Improved Current A/C Likely To Prove Short Lived, But Medium Term Trends Can Improve

South Korea's current account moved back into surplus in September, to $1.61bn, up from the -$3.05bn deficit recorded in August. The goods balance also improved, back to +494mn, versus the -4.45bn deficit prior. This improvement is likely to be short lived though, given the October trade deficit showed a re-widening to -6.7bn, from -3.78bn in September.

• The chart below plots the current account balance against the trade position (the orange line). While there is a clear levels difference between the two series, the directional correlation is fairly firm.

Fig 1: South Korea Trade Balance & Current Account Trends

Source: MNI - Market News/Bloomberg

• There is still scope for improved trade balance outcomes in coming months, given a better terms of trade (ToT) backdrop relative to earlier in the year. The rate of improvement though in the Citi South Korean ToT proxy has slowed somewhat. Not surprisingly, this index shares a strong inverse relationship with global commodity prices, see the second chart below.
• The terms of trade outlook and how that flows into the current account position for South Korea, will be an important KRW driver over the medium term.
• Short-term gyrations are likely to be guided by broader risk appetite though, particularly in the equity space, which is looking firmer at the moment, as we highlighted earlier.

Fig 2: Citi South Korea ToT Proxy & Global Commodity Prices

Source: MNI - Market News/Bloomberg