USDKRW opened slightly higher this.......>

KOREAN WON: USDKRW opened slightly higher this morning and is approaching a key

level of resistance at the 50DMA. The positive news regarding North Korea's

halting of nuclear tests has failed to provide support to the won, suggesting

that a break of resistance is looking increasingly likely. 

-Today's won weakness is in line with the ongoing deterioration in risk-adjusted

real yield spreads relative to the U.S. as U.S. 2-year yields continue to march

higher. While Korean 2-year swaps are also moving higher the spread continues to

move in the U.S.'s favour. The deteriorating yield spread is not being driven by

declining inflation expectations or default risk in Korea.

-The upshot is that USDKRW is ~9% lower than the level that would be justified

by relative real interest rates, based on historical correlations. 

-Even a rapid increase in Korean interest rates would be unlikely to justify the

won's current strength, and we expect to see weakness against the dollar. That

said, we continue to expect strength vs the Japanese yen, which is even more

elevated relative to its fundamentals and has little support from potential

interest rate hikes.