South Korean Won: Strength extends on intervention talk against US Dollar – Commerzbank

Commerzbank economists highlight ongoing Korean Won (KRW) appreciation against the Dollar. USD/KRW slipped 0.1% to 1,430, extending declines from earlier in the week. They attribute KRW strength to reported coordinated FX intervention by the Ministry of Economy and Finance with Japan and sustained exporter Dollar selling, including sizeable forward sales in June.

Intervention and exporters back stronger Won

"July CPI surprised to the downside, easing to 2.8% yoy (Bloomberg consensus: 3.0%) vs 3.2% in June, marking the slowest pace in three months. The moderation was largely driven by softer energy prices. However, core CPI, which excludes volatile food and energy prices, edged up to 2.6% (Bloomberg consensus: 2.5%) vs 2.5% in June, suggesting that underlying price pressures are continuing to broaden beyond supply-side factors."

"Looking ahead, inflation is likely to pick up sharply in August due to low base effects from last year's one-off telecommunications discount programme. Thereafter, inflation should ease albeit gradually as the government relief measures fade. However, persistent core inflation, resilient domestic demand, and continued spillover effects from the semiconductor boom into wages and services are likely to keep inflation above the Bank of Korea's (BoK) 2% target."

"On monetary policy, we expect the BoK to deliver one additional 25bp rate hike this year, taking the Base Rate to 3.0%, in line with its latest median policy rate projection. The July MPC minutes reinforced BoK's tightening bias. Members highlighted that the semiconductor-led recovery is becoming increasingly broad-based and warned that stronger household income, corporate investment, and domestic demand could generate more persistent inflation."

"In FX, USD/KRW fell 0.1% to 1,430 yesterday, extending losses after a 0.5% decline on Monday and a 1.3% drop last week. KRW strength was supported by reports that the Ministry of Economy and Finance intervened in the FX market last Thursday in coordination with Japan. Exporter USD selling also aided KRW, with domestic corporate net selling USD9.3bn of forwards in June."

"Policymakers also expressed concern over rising household debt, higher Seoul apartment prices and financial market imbalances, suggesting that financial stability considerations will remain an important factor in future policy decisions."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)