Goldman Sachs Sees Further Won Gains In H2

Goldman Sachs sees further won gains in H2. Year end forecast is 1230 in USD/KRW and they like short TWD/KRW, see below for more details.

"The Korean Won has been the best performing currency in Asia over the past week, riding the broader Dollar depreciation wave. But that comes after an unusual first half of the year where the Won depreciated even as local equities were up around 15%. Over the years, the Won has been a reliably ‘equity-centric’ currency, and this type of divergence has typically been followed by a bout of better currency performance. We think that pattern should repeat, especially since some of the headwinds that drove the KRW to underperform in the first half of the year should be less strong in the second half.

First, its tough for the Won to appreciate when the (Japanese) Yen and (Chinese) Yuan are depreciating sharply. We still remain cautious on the CNY but think that the pace of depreciation should be slower given targeted stimulus and more policy pushback. Likewise, if the BoJ tweaks its YCC policy at the end of the month, that should mean some room for Yen strength even if the extent of it ultimately disappoints investors.

Second, there are some tentative signals that industrial production and semiconductor exports may be bottoming in Korea, and if that presages a broader stabilization in manufacturing, that should provide further cyclical support for local assets—the Kospi is still our favourite global cyclical exposure across the EM equity landscape and continued equity inflows should also support the Won.

And finally, our economists maintain the view that the BOK will stay on hold for the remainder of 2023, with an easing cycle only starting in Q1 2024. Taken together, we see risks that our year-end target of 1230 for USD/KRW could be achieved even earlier, and continue to like being long the Won (including our carry-efficient recommendation to be short TWD/KRW)."