South Korean Won: Strong exports and policy support KRW – Commerzbank

Commerzbank’s Moses Lim notes that USD/KRW declined on Friday and over the week as robust South Korean exports and supportive policy actions bolstered the Korean Won. Elevated but easing inflation allows the Bank of Korea to stay hawkish while likely holding rates in October. Reduced government bond issuance and exporter Dollar selling further underpin domestic markets and the currency.

Won benefits from exports and bonds

"September CPI matched expectations and eased to 2.9% yoy from 3.1% in August. The moderation was largely driven by government relief measures such as petroleum price caps and a KRW193bn subsidy programme to contain food prices during the Chuseok holiday period. Core inflation also slowed, moderating to 2.8% from 3.4% previously as August's favourable base effects faded. Despite the decline, headline inflation remained above the Bank of Korea's (BoK) 2% target for a seventh consecutive month, suggesting underlying price pressures remain elevated."

"On trade, September exports surprised on the upside, rising 83.5% yoy (Bloomberg consensus: 62.5%) vs 68.7% in August. The outperformance came despite fewer working days, with calendar-adjusted exports accelerating to 104.8% vs 72.5% previously. Semiconductor exports remained the main growth engine, surging 262% vs 209% previously. Higher export prices likely continued to provide support."

"In FX, USD/KRW fell 0.9% to 1,348 last Friday, bringing its weekly decline to 0.8%. There were reports of increased dollar selling from major domestic exporters as firms repatriated overseas earnings to finance domestic capital expenditure. Additionally, a softer USD on Friday provided additional support to KRW. "

"On monetary policy, elevated inflation and strong export growth momentum should allow BoK to maintain its hawkish stance. However, given its back-to-back 25bp hikes in July and August, BoK will likely stay on hold at 3.0% in October to assess the cumulative impact of prior rate hikes."

"Separately, the Ministry of Finance and Economy announced plans to issue KRW12tn of bonds in October, KRW5tn less than initially planned. The reduction will be financed through higher-than-expected tax revenues generated by the electronics upcycle. Finance Minister Lee Hyoung-il also signalled that the government is willing to scale back bond issuance or conduct emergency buybacks to stabilise the bond market."

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