USDKRW has strengthened back to 1,074.........>

KOREA: USDKRW has strengthened back to 1,074 following the slight recovery in

global risk appetite, with the pair heading towards its 50DMA and 100DMA,

currently at 1,072. Final Q2 GDP data will be released tomorrow with

expectations for 2.8% y/y growth. The won's short-term direction is likely to

take cues from this release, as well as global currents.

- Korean rate expectations have recovered sharply today after declining over

recent weeks, with the 6-month interest rate swap rising 3bps to 1.72%, implying

one rate hike by the BOK this year. The curve has continued to flatten though,

with just 12bps separating the 6-month and 12-month contracts. Just 36bps

separate the 12-month from the 5-year swap, as markets expect the BOK's hiking

cycle to be very shallow.

- This is supported by the still-low level of inflation expectations with 8-year

breakeven inflation expectations at just 88bps. The main upside risk to rates

comes from a re-acceleration in the oil price rally given Korea is a major

energy importer. The main downside risks come from an escalation of trade

tensions between China and the US and a reescalation of the eurozone crisis.