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Holding On To This Week’s Gains

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Executive summary

  • Bank of Korea decided to follow CEEMEA/Latam central banks and has embarked into a tightening cycle in the past six months to ease the rising inflationary pressures.
  • However, South Korea’s biggest trading partner China is keeping its ‘zero-Covid policy’, which has been constantly weighing on growth expectations in the past year and therefore could impact Korean economic activity in the medium term.
  • A significant slowdown in the economic activity combined with a deceleration in global liquidity could lead to greater volatility in 2022 and therefore weigh on Korean domestic assets and the KRW.

Link to full article:

South Korea SLowdown.pdf

The Korean won has also been acting as a ‘risk-on’ currency in the past 30 years, which tends to depreciate significantly in periods of rising volatility (i.e. VIX). The chart below shows the strong co-movement between JPYKRW (risk off pair) and price volatility (VIX) in the past thirty years. As growth expectations in SK continue to fade in 2022 and global liquidity continues to decelerate, risky assets could experience greater volatility this year, which would be negative for the KRW.

Source: Bloomberg/MNI

MNI London Bureau | +44 203-865-3850 | yvan.berthoux@marketnews.com
MNI London Bureau | +44 203-865-3850 | yvan.berthoux@marketnews.com

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