USDKRW has fallen back below its.........>

KOREAN WON: USDKRW has fallen back below its 100DMA and 50DMA, back into the

1060-1080 range where it has spent most of the year. The won strengthened in

spite of a further increase in U.S. 2-year yields relative to Korea.

- KRWJPY has also risen strongly, breaking through its 100DMA to a new 3-month

high, currently trading at 10.23.

- We continue to see USDKRW reversing to the upside as the widening interest

rate spread with the USD begins to bite. Based on the historical correlation

between USDKRW and the spread between U.S. and Korean 2-year yields (adjusting

for inflation expectations and default risk), the dollar is ~9% undervalued.

- However, we still see potential for the won to outperform the yen, as the

latter should also weaken vs the USD as yield spreads continue to head in the

U.S.' favour.

- We also see the potential for inflation expectations to continue rising in

Japan, further undermining real yields. In contrast, inflation expectations in

Korea should remain low thanks to its improving external balance sheet and solid

fiscal outlook.