Won Bears bet even the most hawkish BOK will fail to match the Fed

(Bloomberg) – Forex traders are betting there’s more downside ahead for the beleaguered won as policymakers’ efforts to stem its decline are overtaken by the Federal Reserve’s most aggressive tightening campaign since the 1980s .

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The won has fallen more than 16% to 1,421.60 to the dollar this year and forecasters including Bank of America Corp. predict it could weaken to 1,500 by the end of the year. , with traders focusing on the widening yield gap with the US. Swap markets expect the Bank of Korea to raise its key rate to 3.5% in the next six months, a 14-year high, while economists expect a peak of around 5% for the Fed’s benchmark in early 2023.

“Asian currencies will be under pressure leading to further rate hikes, but they still aren’t doing enough,” said Trinh Nguyen, senior economist at Natixis SA in Hong Kong. “Asian central banks have lagged as they have relied on fiscal policy to heavily fight inflation through subsidies and tariff removal, but with the energy crisis prolonging, fiscal space has narrowed. is considerably shrunk.”

Nomura Holdings Inc., Mizuho Financial Group Inc. and ING Financial Markets, which along with Bank of America are the most bearish, also expect the currency to weaken to 1,500 from a median forecast of 1,450. per dollar in a Bloomberg survey. Bank of America strategists including Claudio Piron and Adarsh ​​Sinha said earnings weakness will persist until the Fed halts its hike and China’s economy recovers.

A slowdown in Korean exports and dwindling foreign exchange reserves add to bearish sentiment for the won. More recently, a rare default on commercial paper by developer Legoland Korea has sparked fresh concerns about the health of the country’s credit market. Warnings about possible intervention by policymakers failed to stem the decline of the won.

South Korea pledges $35 billion to support credit markets

“The main drivers of the won have been external so far, but domestic factors such as deficits and credit risks are starting to surface,” said Park Sang-hyun, an economist at HI Investment & Securities in Seoul. Park expects the won to fall to 1,450 this year as the risk of an economic slowdown in China persists.

Even if the domestic situation improves, analysts said the won’s outlook will be largely determined by the actions of the Fed, which economists said will rise 75 basis points for the fourth straight time at its meeting earlier. late this week.

“I expect the Fed to deliver a fifth 75 basis point hike in December after a fourth next month,” said Qi Gao, currency strategist at Scotiabank in Singapore, adding that in this scenario, the Indonesian rupiah, Thai baht and Korean won could underperform.

Here are the main Asian economic data expected this week:

  • Monday October 31: Australia Retail Sales, Japan Industrial Production, Japan Retail Sales, South Korea Industrial Production, China Manufacturing PMI, Thailand Current Account Balance, Thailand Trade Data, Hong Kong GDP

  • Tuesday September 1: RBA Cash Rate Target, New Zealand Building Permits, South Korea Trade Data, China Caixin Manufacturing PMI, Indonesia CPI, Taiwan S&P Manufacturing PMI, Hong Kong Retail Sales

  • Wednesday September 2: construction permits in Australia, unemployment rate in New Zealand, PMI in Singapore, CPI in South Korea

  • Thursday, September 3: Australian trade data, South Korea’s foreign exchange reserves, Malaysia’s overnight policy rate, Hong Kong’s S&P manufacturing PMI

  • Friday, September 4: RBA Statement on Monetary Policy, Singapore Retail Sales, China Current Account Balance, Thailand CPI, Philippines CPI, Philippines Trade Data, Reserves Taiwan currency exchange

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