Won jumps as BOK tries to tame inflation with rate hike

Bloomberg

South Korea’s won has regained some ground after a dismal third quarter and a coming interest-rate hike could give it another boost.
The won could rise as high as 1,120 per dollar this quarter from around 1,182 now as the Bank of Korea (BOK) moves to normalise policy and uncertainties surrounding the Fed’s tapering eases, according to Kiwoom Securities Co. The currency may climb to 1,140 by year-end, says KB Kookmin Bank.
The global shift to a tighter policy may define the performance of emerging Asian currencies in the coming months, with central banks that have room to hike likely to preserve a yield advantage. For the won, the improving economic outlook may also help as buoyant exports and a sizable current-account surplus provide support.
“South Korea’s economy had another decent quarter in the third quarter,” said Sue Trinh, senior global macro strategist at Manulife Investment Management. “A hawkish BOK will also protect yield spread as the market reassesses prospects for a more hawkish Federal Reserve.”
South Korea’s currency has gained about 0.6% in the past one month after sliding almost 5% in the third quarter. An easing of virus curbs and signs that the domestic economic recovery is gaining momentum have buoyed sentiment.
“Risk appetite should recover as uncertainties are expected to ease with the Fed disclosing more details on its normalisation plan going forward,” said Kim Yumi, a market strategist at Kiwoom. “Persistent inflation will probably be another driver for won’s strength as it’s ultimately linked to more rate hikes.”
Governor Lee Ju-yeol has indicated that policy makers may raise borrowing costs again in November to address financial imbalances and quickening inflation. Robust exports and an improving labour market are likely to bolster the case for a reduction of stimulus.
Barclays expects the won to strengthen to 1,145 by year-end, thanks to strong demand for South Korea’s tech shipments and nation’s ability to contain pandemic. It sees BOK hiking again in first half of 2022 after a likely increase this month.

“Consumption should probably rebound in time for the Christmas season,” said David Chao, global market strategist for Asia Pacific ex-Japan at Invesco in Hong Kong. “I’m pretty confident the government will be able to contain the current wave of new infections quickly and the vaccination rate is rising fast.”
“Valuations are cheap, and the medium-term outlook for the currency is constructive to bullish,” said Ashish Agrawal, head of FX and EM macro strategy research for Asia at Barclays. “But in the short run, its sensitivity to relatively opaque equities flows makes it a little more challenging.”