Goldman: Turning Slightly More Constructive As BoK Steps Up Hawkishness

Goldman Sachs note that “the Korean Won has been one of the worst-performing currencies in Asia this year along with JPY and TWD. However, we expect the KRW’s underperformance vs. NJA FX to fade. We have recently revised our BoK forecast, and now expect Korea’s central bank to reach a slightly higher terminal rate of 2.75% (vs. previous: 2.50%) at an earlier timing of Q422 (vs. previous: Q223). The forecast revision is driven both by accelerated Fed tightening as well as potential additional upside pressures from imported inflation (mainly crude oil) as our commodities team expects. The BoK’s May MPC meeting as well as the Finance Ministry’s economic policy directions suggest that Korea policymakers’ clear near-term priority is to manage inflation risks. However, we continue to believe that the BoK is unlikely to deliver the aggressive tightening that interest rate swap markets are pricing (+200bp over the next 12-months), considering stagnating exports and potential sharp increases in interest payment burdens associated with high household debt levels. An alternative avenue for the authorities can curb inflation is to manage excessive KRW weakness, given potential spillovers to CPI inflation. More than two-thirds of Korea’s CPI inflation was accounted for by sharp increases in import prices in Q122. Meanwhile, with the potential for USD/JPY to eventually fall from its current stretched levels, and given the potential for a further pick-up in Chinese sequential growth ahead, we turn slightly more constructive on the KRW in the near-term.”