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Won Still Lagging Firmer Equities, Correlations With CNH & JPY Remain High

KRW

USD/KRW has tracked recent ranges during today's session. We saw an earlier high of above 1316 in terms of onshore spot but have stayed within a 1313/1315 range for the most part.

  • The won continues to lag the broader improvement in risk appetite, as reflected in the improvement in local equities, see the chart below.
  • The rebound in local equities, which has continued today, suggests USD/KRW should be somewhere roughly closer to 1300.
  • Part of this divergence likely reflects higher USD/CNH and USD/JPY levels. Won correlation with both currencies remains fairly high. USD/KRW and USD/CNH sits at over 90% for the past 6 months, while the equivalent correlation with USD/JPY is at similar levels.
  • Hence, we may see this divergence between KRW and the Kospi persist in the near term, at least from a levels standpoint and potentially until we have a more definitive USD peak.
  • Earlier, the first 20 days export data painted a fairly resilient picture for July, which should lower fears of a sharp slowdown in external growth, although not surprisingly export growth to China remains quite weak. The trade position also remains comfortably in deficit.
  • From a longer-term technical standpoint, all major moving averages for USD/KRW continue to trend higher. The 50-day MA, which comes in at 1285, has been a strong support point since mid 2021. Breaks below this level have proven false and represented a buying opportunity in the pair.

Fig 1: USD/KRW & Kospi Performance

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USD/KRW has tracked recent ranges during today's session. We saw an earlier high of above 1316 in terms of onshore spot but have stayed within a 1313/1315 range for the most part.

  • The won continues to lag the broader improvement in risk appetite, as reflected in the improvement in local equities, see the chart below.
  • The rebound in local equities, which has continued today, suggests USD/KRW should be somewhere roughly closer to 1300.
  • Part of this divergence likely reflects higher USD/CNH and USD/JPY levels. Won correlation with both currencies remains fairly high. USD/KRW and USD/CNH sits at over 90% for the past 6 months, while the equivalent correlation with USD/JPY is at similar levels.
  • Hence, we may see this divergence between KRW and the Kospi persist in the near term, at least from a levels standpoint and potentially until we have a more definitive USD peak.
  • Earlier, the first 20 days export data painted a fairly resilient picture for July, which should lower fears of a sharp slowdown in external growth, although not surprisingly export growth to China remains quite weak. The trade position also remains comfortably in deficit.
  • From a longer-term technical standpoint, all major moving averages for USD/KRW continue to trend higher. The 50-day MA, which comes in at 1285, has been a strong support point since mid 2021. Breaks below this level have proven false and represented a buying opportunity in the pair.

Fig 1: USD/KRW & Kospi Performance

Keep reading...Show less