Goldman Sachs: Continued FX weakness heading into BoK

Goldman Sachs note that the “underperformance of the KRW has been striking: in recent weeks, the KRW has been among the worst-performing currencies in Asia, depreciating by roughly 2% versus the USD since mid-December. And, over the past year, KRW has depreciated by nearly 10% versus the Dollar, even as both CNY (Asia’s regional anchor currency), and TWD (another tech-driven Asian low-yielder), made modest gains versus the greenback.”

• “Some of this underperformance likely reflects KRW’s relatively large ‘beta’ to a more challenging global environment and, in particular, the KRW’s reliable pattern of selling off when U.S. rates rise. And, on the domestic side, KRW weakness likely reflects (i) a growth picture that has been challenged by a difficult covid wave, (ii) a trade surplus that has fallen, and (iii) with the Kospi index trading sideways-to-lower for most of the past year, relatively subdued equity inflows
• “For the KRW to regain some ground, some of these domestic factors may need to shift in a more FX-friendly direction. This week’s meeting of the Bank of Korea (BoK) is one opportunity: we now expect a BoK hike next week, given nascent improvements in coronavirus cases, prospects of fiscal support, and recent hawkish signals from policymakers that reflect an elevated inflation outlook in Korea. Looking ahead, the March Presidential election in Korea, too, could provide some support, as the KRW has tended to strengthen in the three months ahead of major elections.”