What South Korea’s central bank head Lee Ju Yeol views in the intervention issue is USD/KRW is far to high and must drop therefore KRW rises. Yet Lee overall spoke intervention before in January and February against statements to only intervene if exchanges rates fell outside normal market activity.
While South Korea’s headline interest rate is currently 1.50%, it traded in February from 1.49% to 1.54% and the average deposit rate jumped to 1.80% in January and February. Why February is because the BOK releases interest rates at month end.
3 month Kibor however remains stable over the past 7 months at exactly 1.65% and contains no effect to the recent rise in USD’s Libor -OIS rate.
In 3 month USD Libor in March was 2.31, 2.02 in February and 1.78 in January V the BOK at 1.65. The 3 month Kibor rate tracks current 3 month CD’s, now at 1.65 and stable over the past 8 months.
The 10 year KRW bond yield in March was 2.74%, down from 2.86% in February and 2.71 in January. Overall, no alarming indications to an immediate intervention and Lee’s statements may serve strictly as a warning.
While South Korea and Japan import Steel and Aluminum to the United States, the main exports are autos as $21 billion in Korea auto imports were recorded for the full year in 2016 and this figure is rising. Total trade in 2016 was $144 billion as the US exported $63 billion to South Korea’s $80 billion imports and a $17 billion deficit.
Korea is the US 6th largest supplier of goods and a vital market to Korea overall as the 2017 deficit in goods reached $25 billion as far more imports than exports are shipped to the United States. Its the Good side of the equation as cause for Trade concerns overall.
Korea maintains a Tree Trade Agreement with the United States since 2007, renewed in 2012 and the assumption is Korea will maintain Free Trade status in the yet to be signed new agreement.
Second aspect to intervention is an explosion is coming to the USD/HKD V USD/CNY relationship and more Correlation work is needed to assess what this means for KRW from a trading angle. The BOK sees this scenario overtime as they calculate their exchange rates from long term perspectives. What BOK sees, I see as well.
The overall assumption for all Asia currencies against Trump’s Steel and Aluminum Tariffs is to devalue the currencies. The assumption however is ongoing and yet to materialize but intervention may be the first of more to come by Asia’s central banks.
The BOK and Lee are watching USD/KRW 1073.59, 1078.88, 1095.64 then the 14 year average at 1098.07. Most vital overall are 1078.88 and 1098.07 as breaks will take USD/KRW higher to 1111.00’s over time.
The problem with higher USD/KRW is the current 1058.07 price is far to high and must travel lower yet at 1058.07 is off the charts and must rise.
Technically, USD/KRW is literally in a nightmare and complete dilemma position overall. Nightmare is hardly a technical word but USD/KRW is struggling against itself and its the same scenario reported Monday in USD/JPY. The assumption is more Asia pairs will reveal the same dilemma.
As to direction its unsure of itself. Its not a pair to trade currently.
Further and most vital Asia pairs to watch, followed by break points as reported currency pairs below are most important to not only trade but the CNY V HKD relationship.
CNY/JPY , 16.9010 and 17.0576. 5 year average = 17.1668. Current price = 16.8745
CNY/KRW — 169.2337 and 167.9023 Vs 5 year average = 173.9914. Current price = 167.97
Brian Twomey