USD/KRW: Korean won likely to strengthen over the next months – MUFG

The Korean won will likely find some support from returning capital inflows and also on the economic outlook, explained analysts at MUFG Bank. They forecast USD/KRW at 1270.0 by the end of the third quarter and at 1250.0 by year end. 

Key Quotes:

“BOK raised its seven-day repurchase rate by 50bps to 2.25% as expected on July 13, the biggest increase since interest rates became its primary policy tool in 1999. BOK Governor Rhee Chang-yong indicated that larger hikes were not becoming a new norm.”

“Compared with June’s 5.1% depreciation, USD/KRW’s muted net performance in July reflected the support that KRW received on domestic factors. The benchmark KOSPI Index climbed up by 3% (vs June’s -13%) and foreign investors bought a net USD0.8 bn worth of Korea’s local equities (vs a net selling of roughly USD4.8 bn in June).”

“Looking ahead, given the South Korean government keeps Covid regulations relaxed, we expect a continued recovery in consumption, offsetting part of the potential weakness in external demand due to slowing growths in the US and EU. Recovering dometic demand will likely encourage foreign capital to continue returning to Korean markets. In addition, this better-than-expected Q2 GDP print could allow the BOK more room in hiking rates for the purpose of taming inflation, which could help with Korea’s government bond yield spreads with the US.”