J.P.Morgan Issue Long USD/KRW Recommendation

Wednesday saw J.P.Morgan note that they see “KRW weakening into year-end due to outflows by foreigners from Korean equities and sensitivity to CNY. We previously noted that we view USD/KRW as a buy on dips. With the sell-off in the dollar giving us a better entry, we buy USD/KRW 12m NDF at 1,256.65 (spot 1,264.50). We initiate this trade with a 2% stop-loss (1,230 for the NDF).

• “In our study of KRW we found that the chief driver of this currency is equity flows by foreigners, owing to the fact that the current account is effectively neutralized by local buying of overseas securities. This recycling of the current account should continue this year with local buying of foreign equities and NPS buying of foreign debt (which is unhedged) expected to be $69bn, versus our economists’ forecast of a $67 current account surplus. We expect foreign equity outflows to continue given intensifying global economic headwinds with our economists expecting this quarter to be the weakest in terms of global growth since the GFC outside of 2020. If foreign equity outflows continue at just $1.5bn per month (in reality it has been $2.5bn per month YTD and $1.2bn for May thus far), we estimate that this should guide USDKRW spot higher to around 1,330 by year-end.”
• “In our equity-driven model we estimate that USDKRW should be trading around 1,220. Spot is trading 1.0 standard deviations above this level, which we think is a tolerable premium for those wanting to long the pair.”
• “We find that KRW has relatively high sensitivity to CNY among Asia FX, along with other exporters MYR and TWD. Previously we saw the rally in USDKRW as greater than expected given the pair’s recent beta to USD/CNY, but now we see it as roughly commensurate. We expect USD/CNY to rise to 6.95 by year-end.”