Asia | COVID | Emerging Markets | FX
KRW/USD futures have stabilised around 0.84 (USD/KRW at 1185) – its post-COVID highs(lows) – in recent weeks. This comes even as Korea faces a second wave of COVID-19 cases. The scale of the wave is much smaller than the first, but nevertheless authorities have introduced measures to contain the outbreak, which has raised the spectre of a slowdown in economic activity. Korean stocks have taken notice and have started to weaken, and foreign inflows have been absent. The question, then, is whether KRW will follow stocks into weakening. For now, we do not think so.
One reason is that the authorities are unlikely to implement a full countrywide lockdown. So far, measures have revolved around prohibiting large social gatherings in Seoul and tightening social distancing guidelines. Such steps are unlikely to impact economic activity too much. Korea’s favoured approach of using track-and-trace technology also limits the economic fallout. This could reduce the link between the increase in COVID cases and the currency.
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USD/KRW has stabilised around 1185 – its post-COVID lows – in recent weeks. This comes even as Korea faces a second wave of COVID-19 cases. The scale of the wave is much smaller than the first, but nevertheless authorities have introduced measures to contain the outbreak, which has raised the spectre of a slowdown in economic activity. Korean stocks have taken notice and have started to weaken, and foreign inflows have been absent. The question, then, is whether KRW will follow stocks into weakening. For now, we do not think so.
One reason is that the authorities are unlikely to implement a full countrywide lockdown. So far, measures have revolved around prohibiting large social gatherings in Seoul and tightening social distancing guidelines. Such steps are unlikely to impact economic activity too much. Korea’s favoured approach of using track-and-trace technology also limits the economic fallout. This could reduce the link between the increase in COVID cases and the currency.
Another reason for caution in looking for KRW weakness is that the KOSPI has started to outperform the S&P500 (Chart 1). If years of KOSPI relative underperformance are behind us, that should support KRW. Admittedly, there is little evidence of foreign inflows, and the domestic pension sector is allocating abroad. Therefore, we would need to see evidence of flows supporting the shift in prices, but it does present a more balanced view on KRW.
On the more optimistic side, recent economic data has been promising. Korean unemployment showed another drop to 4.2%, suggesting the peak has passed. Significant fiscal stimulus has helped, facilitating public sector job creation and subsidised job retention schemes for the private sector. Employment declines have been less than in most other OECD countries, and Korea is expected to record the shallowest recession across the OECD group. And with the domestic economy slowly recovering, this should also limit future job losses.
In terms of market levels – while USD/KRW at 1185 may appear on the low side, it did reach 1160 in January. Moreover, our valuations suggest that KRW is around 7% undervalued (Chart 2). We therefore look for KRW to weather the COVID second wave, which could set it for strength in coming weeks.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)