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Morgan Stanley Think KRW Has Overshot

SOUTH KOREA
  • MS write that last week's break in USD/KRW above 1160 came amid weak sentiment due to rising daily new COVID-19 cases and the semi tech-led stock sell-off. More importantly, recent Street concern about Korea's semiconductor industry has been building and driving this round of sell-off in both KOSPI and KRW.
  • They think that the FX market has overshot. According to historical patterns, MS think that USD/KRW can come back to 1145-1150 in the next 1-2 weeks.
  • Historically speaking, when KRW weakened due to significant KOSPI selling from foreigners (i.e., selling size > 0.1% of total KOSPI market cap) for a few days in a row, usually foreign outflows would then stabilise for the next few days. KRW would then rebound.
  • MS think that this time should be similar as well. In the near term, they don't expect USD/KRW to break above the 1170-1175 range in the next 1-2 weeks (unless DXY sees another leg of significant rally).
  • They think that USD/KRW will retreat from 1169 back to 1145-1150 in the next few weeks, correcting the overshoot.
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