USD/KRW: BoK hikes, won to reverse its decline – TDS

The Bank of Korea (BoK) hiked the policy rate by 25bp to 0.75%, making it the first major central bank in the region to do so. Economists at TD Securities remain constructive on KRW, with its recent decline likely to reverse.

Further gradual hikes are likely

“BoK hiked its 7-day repo rate by 25bp to 0.75%, becoming the first major Asian central bank to hike. The decision was not unanimous with one BoK member opposing the hike.”

“Interest rate markets continue to price in further hikes in the months ahead, with close to 75bps of hikes priced in over the next 1 year. We do not expect this to be a one and done decision, with at least another couple of hikes likely in the months ahead, potentially with another 25bp move at the November 25 meeting.”

“The BoK maintained its 2021 GDP growth forecast at 4% and 2022 forecast at 3%, which brings its forecasts more in line with consensus. We think this year's forecast is reasonable given that activity has held up well over recent months.”

“In light of persistently higher inflation readings largely due to covid related disruptions, BoK raised its 2021 CPI forecast to 2.1% vs. 1.8% predicted in May and marginally raised its 2022 inflation forecast to 1.5% vs. 1.4% previously predicted. We think CPI will ease into next year but will remain at an uncomfortably high level in the next few months.”

“We do not think the decision will set a precedent for other Asian central banks. Most central banks are set to maintain an accommodative bias even if further easing in the region is unlikely.”

“We remain constructive on KRW especially as rate hikes will help to result in higher real rates from current low levels. Near-term, USD/KRW resistance will likely be seen around the 50% Fibonacci level around 1175, with support around 1147.”