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Korean won gains but capped up to 1150 amid puzzling LT trend

FX_IDC:USDKRW   US DOLLAR / WON
30 0 5
Technically, USDKRW             takes support at 1152.32 levels cushioned by BoK’s unexpected rate cut event.

The duos (leading indicators) that signal momentum in Bull Run is converging ongoing price rallies (observe daily chart the strength index bounces back as & when it approaches 40 levels).

Stochastic curves evidence %K crossover right from oversold territory.

On the contrary, 7DMA crosses below 21DMA which is absolutely a sell signal, but we foresee that there’s a room for prices bounces up to 1150 as this sell signal is a lagging indication. Upcoming price behaviour should follow this signal.

We expect one more rate cut, as one-off cut may raise market interest rates, the key question now is whether there will be any further BoK             rate cuts in the near future, and our answer is ‘yes.’ We do think the downside risks to growth will continue to outweigh the upside risks for the time being.

The most important factor that leads us to expect at least one more rate cut is the expectation that a one-off cut will increase the chances of a rise in market interest rates.

In 2013, we saw a one-off rate cut in May being followed by a significant rise in market interest rates.

Admittedly, the jump in the market interest rate in 2013 was driven by the ‘Taper Tantrum’, i.e. worries over the tapering of the Fed’s quantitative easing.

While GDP forecasts for H2 2016 and 2017 have been lowered slightly, to 2.7% and 2.8%, respectively (formerly 2.8% and 3.0%), which should also be in line with the BoK’s revised forecasts in July.

We also maintain our base scenario of a supplementary budget to avoid a ‘fiscal cliff’ at the end of this year and remove the 50bp rate hike from our long-term BoK             policy forecast. Our end-2019 BoK             policy rate now stands at 0.5%.

But similar concerns regarding the Fed’s tightening action also apply to the current situation: the possibility of a Fed rate hike will be a major source of risk for the global financial markets in H2 this year.

We conclude that the BoK             will implement one more 25bp rate cut to maximise the impact of its monetary easing actions. The most likely timing for a rate cut will be Q3, before the likely Fed rate hike in December.
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