SINGAPORE: While the Bank of Korea has little scope to hike interest rates to defend the won at its meeting this week, investors trading on technical levels in the foreign-exchange market may help arrest the currency’s decline.
Policy makers in Seoul have struggled to slow the won’s fall against the dollar, despite a flurry of jawboning comments from the central bank and the finance ministry, since it broke out of a 10-month trading range in April.
Yet the won’s 6.1% decline against the greenback, which makes it Asia’s worst-performing currency this year, has brought large speed bumps into sight.
“The magnitude of the KRW’s under-performance shows the market has disregarded South Korea’s strong fundamentals,” says Ronald Man, a strategist at Bank of America Merrill Lynch in Hong Kong.
Given the nation’s current account surplus and adequate foreign exchange reserves, the won normally outperforms its Asian peers as risk-off sentiment rises, according to Man. He believes that it is “just a matter of time before onshore corporates start selling” dollar-won.
He sees the pair at 1,140 this quarter and 1,110 at year-end, compared with its close Friday of 1,188.30.
A sharp drop in Korean semiconductor exports, some speculation for a rate cut, and the US-China trade war have combined to hurt the won. Its decline has outpaced the next two worst-performing Asian emerging-market currencies, with the Taiwan dollar down 2.5% and the Malaysian ringgit falling 1.3%.
From a technical viewpoint, the dollar-won’s %D slow stochastics reading has risen to 94, suggesting it’s overextended. That increases the probability that the pair will at least consolidate near-term. Support at 1,213.22, a low on Jan. 3, 2017, should also help limit short-term weakness.
This should be some comfort to the Bank of Korea, given that the US-China trade war and a raft of poor domestic data virtually rule out any prospect of policy makers raising interest rates when they meet on May 31.
While expectations are mounting that the Bank of Korea will need to cut rates later this year to spur the economy, the currency’s woes make this a dicey proposition. Doing nothing could actually look a bit like standing firm as the chorus of other central banks turning dovish gets louder, adding a smidgen more support to the won.