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KRW: HSBC Updated Thinking On USD/KRW

KRW
EM BulletBulletSouth KoreaAPACEmerging Market News

The global bank updates its thinking on USD/KRW. With the pair normalizing from political volatility, it sees focus shifting back to traditional drivers, which still may present upside risks for USD/KRW per the bank. See below for more details. 

HSBC: "The BoK cut rates as widely expected and suggested that there could still be 1-2 cuts more. When it held rates unchanged at its 16 January meeting, the BoK said USD-KRW had overshot its fundamental level by 30 won because of political events. Since then, USD-KRW has fallen by c25 won. And compared to the high levels reached in late December, it has fallen by c40 won. A reduction of long USD-KRW positioning (from being the most long USD-Asia pair in December to being the fourth as of 20 February, according to a Reuters poll) and the NPS’s supposedly activated FX hedging mechanism (Yonhap, 7 January) have likely helped.

With USD-KRW normalising from political volatility, we focus on its more typical drivers: major currencies’ trajectories (USD, RMB, JPY), global equity market performance (proxy for risk appetite), US yields (typically has a slightly higher explanatory power for USD-KRW than the US-Korea yield differential), US tariff headlines (be it for key local industries like autos and semiconductors, or regarding China due to the economic linkages) and the FX demand-supply flow picture. We think USD-KRW still faces upward pressure from these sources. We await more details on the NPS’s January balance sheet – likely to be published at the end of March – to ascertain if its FX hedging seem sufficient to contain the upside.

High frequency indicators suggest that there are still persistent (albeit slightly lower versus 4Q24) equity outflows by foreigners. Last year, according to balance of payments data, retail investors bought USD24bn of foreign equities and bonds, but asset managers bought even more – USD30bn – while the NPS temporarily curbed its medium-term divestment strategy to only buy USD13bn. The silver lining is that spot DRAM prices have been rising in recent weeks (after falling for the past few months) and new tech orders in the BoK’s Business Sentiment Index rose sharply in February. But it is difficult to say if this is related to “front-loading” ahead of tariff deadlines (2 April for semiconductor tariffs)." 

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The global bank updates its thinking on USD/KRW. With the pair normalizing from political volatility, it sees focus shifting back to traditional drivers, which still may present upside risks for USD/KRW per the bank. See below for more details. 

HSBC: "The BoK cut rates as widely expected and suggested that there could still be 1-2 cuts more. When it held rates unchanged at its 16 January meeting, the BoK said USD-KRW had overshot its fundamental level by 30 won because of political events. Since then, USD-KRW has fallen by c25 won. And compared to the high levels reached in late December, it has fallen by c40 won. A reduction of long USD-KRW positioning (from being the most long USD-Asia pair in December to being the fourth as of 20 February, according to a Reuters poll) and the NPS’s supposedly activated FX hedging mechanism (Yonhap, 7 January) have likely helped.

With USD-KRW normalising from political volatility, we focus on its more typical drivers: major currencies’ trajectories (USD, RMB, JPY), global equity market performance (proxy for risk appetite), US yields (typically has a slightly higher explanatory power for USD-KRW than the US-Korea yield differential), US tariff headlines (be it for key local industries like autos and semiconductors, or regarding China due to the economic linkages) and the FX demand-supply flow picture. We think USD-KRW still faces upward pressure from these sources. We await more details on the NPS’s January balance sheet – likely to be published at the end of March – to ascertain if its FX hedging seem sufficient to contain the upside.

High frequency indicators suggest that there are still persistent (albeit slightly lower versus 4Q24) equity outflows by foreigners. Last year, according to balance of payments data, retail investors bought USD24bn of foreign equities and bonds, but asset managers bought even more – USD30bn – while the NPS temporarily curbed its medium-term divestment strategy to only buy USD13bn. The silver lining is that spot DRAM prices have been rising in recent weeks (after falling for the past few months) and new tech orders in the BoK’s Business Sentiment Index rose sharply in February. But it is difficult to say if this is related to “front-loading” ahead of tariff deadlines (2 April for semiconductor tariffs)."