Fed rate hikes further worsen outlook for criticized Korean won

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(Bloomberg) – The South Korean won has been Asia’s worst result in the past six months, and technical indicators suggest the misery is not over yet.

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The won fell to a 17-month low last week, breaking through a key support level. Other indicators, including the convergence-divergence moving average, suggest that the technology-dependent currency may fall further against the dollar.

The Bank of Korea could give traders more reasons to sell the won on Friday if it disappoints groups like Goldman Sachs Group Inc. and Citigroup Inc., which call for a third rate hike sooner rather than later. With the Federal Reserve becoming increasingly hawkish, a hike may not be enough to stem the currency’s decline if the BOK signals a slowdown in policy normalization.

Read more: Goldman now sees Korea hike rates next week on Hawkish panels

“The won appears to be impacted by rising US yields as well as exits of foreign stocks,” said Mitul Kotecha, chief emerging markets strategist for Asia and Europe at TD Securities in Singapore. “Pressure on tech stocks globally is also likely weighing on the currency. Lack of support from local exporters leaves the door open for the won to fall.”

A global liquidation in early 2022 is weighing on Korea’s tech-dependent market, which suffered a net outflow of $ 21 billion last year. 10-year Treasury yields hit their highest level since April, shaking sentiment for emerging market assets.

The dollar-won pair broke through 1,200.35 last week, its 2021 high, to hit 1,203.90. The next key level would be near 1214.09, the 61.8% Fibonacci retracement of the decline from March 2020 to January 2021. The charts also show a bullish ascending triangle for the greenback against the Korean currency.

Governor Lee Ju-yeol previously downplayed the need to keep pace with the Fed’s rate hikes, doubling down on domestic factors as more important considerations. Any accommodating rhetoric on Friday could help exacerbate the won’s weakness, especially if investors respond by reducing the 90 basis points of hikes they have forecast for this year.

A majority of economists expect the BOK to raise rates to 1.25% in the first quarter, although their views are divided on whether the move will come this Friday or at the next meeting. in February.

The currency could find a respite towards the end of the month. According to Min Gyeong-won, an economist at Woori Bank in Seoul, local exporters who have amassed a hefty sum of dollars may start selling before the Lunar New Year, when companies exchange the greenback for won to pay their employees.

Here are the main Asian economic data expected this week:

  • Monday January 10: building permits in Australia, industrial production in Malaysia, consumer confidence in Indonesia

  • Tuesday January 11: Retail sales and trade balance of Australia, trade balance of the Philippines

  • Wednesday January 12: India CPI and industrial production, CPI and PPI in China, job vacancies in Australia, current account balance in Japan and speech by BOJ Governor Kuroda

  • Thursday January 13: Machine tool orders in Japan, consumer confidence in Thailand

  • Friday January 14: Bank of Korea rate decision, China’s trade balance, Australian home loans, Japan’s PPI, India’s trade balance

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