Won’s Rally Nears Final Leg as Signs of Weaker Economy Mount - BNN Bloomberg

(Bloomberg) -- The Korean won’s near 17% rally since late October may be reaching its final stages as signs of a weaker economic outlook contrast with optimism over other emerging-market peers.

Falling demand for semi-conductors is set to weigh on exports at a time when alarm bells are sounding about South Korea losing a global chip war. The focus will be on fourth-quarter growth data due Jan. 26 after the Bank of Korea chief suggested last week economic concerns are surfacing, raising speculation the tightening cycle is winding down. 

Along with other headwinds such as the current account deficit and technical factors, this doesn’t leave much scope for the won to gain and primes investors for a potential shift to other currencies such as the Thai baht. The Korean currency was the best performer in Asia in the fourth quarter.

Read: Global Inflows Amid China Reopening Put Baht in a Sweet Spot

While the Korean currency may benefit from the Chinese economy picking up, sluggish exports are going to drag on the won, said Min Joo Kang, an economist at ING Bank NV. “For the near-term, probably appreciation elements will drive a stronger USD/KRW,” she said. 

Exports fell almost 10% in December, with the chip-making giant reporting its first annual trade deficit since 2008. In addition, Min expects Korea to post a current-account gap this quarter, putting more pressure on the won. 

ING sees the won ending the quarter at 1,230 versus the dollar, compared with 1,235.55 on Friday. 

The won has strengthened, along with emerging-market peers, from late October on signs the Federal Reserve may be nearing its terminal rate with US inflation slowing. Rising equity inflows amid improving risk sentiment aided by China’s re-opening also helped.

Risk Sentiment

However, these stock inflows may moderate, or even turn into outflows if risk sentiment deteriorates further on weaker US earnings or rising economic concerns. Other than weaker exports, Korea is also struggling with a property-market downturn.

Other positives for the won may be fading as Bank of Korea seems to have either reached, or be nearing the end of its rate hike cycle. After the BOK has raised its rate by 300 basis points in 18 months, Governor Rhee Chang-yong said policymakers should now consider the impact on the economy and financial stability.

The won’s rally has left it in overbought territory according to slow stochastics, a momentum indicator. Fibonacci support at 1,219, the 61.8% retracement of its January 2021 to October 2022 rally, presents a big hurdle. 

“There is room for more won strength during the remainder of the first quarter, but given how fast the currency has gained recently, the scope of the rally won’t be too big,” said An Young-jin, an economist at SK Securities Co., who sees USD/KRW at 1,220 at the end of March.

Here are the key Asian economic data due this week: 

• Monday, Jan. 23: BOJ minutes to December meeting
• Tuesday, Jan. 24: Australia business confidence, New Zealand performance services index, Japan PMIs, Thailand customs trade balance
• Wednesday, Jan. 25: Australia 4Q CPI, New Zealand 4Q CPI, Bank of Thailand policy decision, Singapore CPI
• Thursday, Jan. 26: BOJ summary of opinions to January meeting, South Korea 4Q GDP Philippine trade balance and 4Q GDP, Singapore industrial production
• Friday, Jan. 27: Australia 4Q PPI, New Zealand business confidence, South Korea business surveys, Tokyo CPI

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Won’s Rally Nears Final Leg as Signs of Weaker Economy Mount - BNN Bloomberg
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