SocGen: 1Y1Y - To Fade Or Not To Fade? Not To Fade Yet But Soon

Societe Generale believe "Korean 1Y1Y rates above 1.70% present an attractive level to have a tactical receiver with a 10-15bp profit target. The reason why we don't advise such a trade for now is that we would simply like to avoid event risks in the coming weeks. The market is likely to take one or two more 25bp BoK hikes aimed at tackling financial stability in stride. Beyond that, the hurdles for a BoK hike (e.g. a strong domestic consumption recovery and sanguine global growth) will be lifted higher."

• "At current levels the front-end has likely priced in the most hawkish scenarios of BoK policy rate hikes in 9-12 months. Nonetheless, there are other factors to consider, especially amid strong prospective cooperation between the BoK and other financial regulators in regards to financial stability. The first event will be whether LCR regulation will return to normal (100%) from October or not."
• "The policy rate hike at the August MPC made it beneficial for banks to receive more deposits in the future, which should help improve LCR. Bank deposits indeed increased by KRW24.6tn in August, which could be a silver lining for bank funding and in turn compliance with LCR regulations. Therefore, any market stress associated with LCR is unlikely to persist for very long, especially if BoK policy rate hikes accelerate as the market expects."
• "However, there are two other considerations that keep us from fading the recent selloff at the front-end. We would like to check first whether incremental bank funding through deposits will be used for acquiring HQLA instead of funding bank loan business for households and corporates. September bank lending data will be available in the second week of October. Secondly, we also want to have more clarification about the LCR normalisation path. We expect that LCR will be normalised via phasing rather than through a one-off move, which will likely stabilise the front-end."