Forex Flash: Adding to short USD/KRW position – Nomura
FXstreet.com (Barcelona) - Nomura Strategists Craig Chan ansd Wee Choon Teo have decided to fully reinstate their short USD/KRW position having cut back last week due to an unwinding of equity inflows.
However, they now feel that now is the perfect time to reinstate it. They note that since January 22nd, spot USD/KRW has moved up by close to 2.7% and foreign equity holdings have seen an outflow of around US$820mn (as of 25 January).
They write, "Our Korea FX positioning index has also showed long signals for eight consecutive sessions - one of the longest stretches we have seen since June 2012. Foreign bond holdings saw moderate inflows over the same period (US$290mn), consistent with our view of sticky structural inflows. We think the consolidation over the past week offers a good re-entry level now."
They are expecting Korea's January exports number to be a strong release due to improved global demand and partly due to a base effect. This would lend support to their view of a robust current account surplus contributing to KRW strength. Coupled with continued structural inflows, market expectations of a political desire to implement an economic democracy, and a local economy gradually on the mend (they expect the policy rate to stay on hold this year), they believe USD/KRW could reach 1040 by H1 2013.
They see that key risks stem from FX intervention, macro prudential controls and JPY weakness. However, they believe that intervention will be aimed at smoothing volatility rather than targeting specific FX levels. They feel that the market is also well prepared for further FX controls in the event that KRW rebounds sharply, given official rhetoric has been hinting at this possibility since December. On the subject of JPY weakness, they feel that the impact on Asian economies could be overstated. Further, they suspect that the main catalysts for Yen weakness may be close to exhaustion in the near term. Having said this, they are keeping an eye out for a potential currency war.
However, they now feel that now is the perfect time to reinstate it. They note that since January 22nd, spot USD/KRW has moved up by close to 2.7% and foreign equity holdings have seen an outflow of around US$820mn (as of 25 January).
They write, "Our Korea FX positioning index has also showed long signals for eight consecutive sessions - one of the longest stretches we have seen since June 2012. Foreign bond holdings saw moderate inflows over the same period (US$290mn), consistent with our view of sticky structural inflows. We think the consolidation over the past week offers a good re-entry level now."
They are expecting Korea's January exports number to be a strong release due to improved global demand and partly due to a base effect. This would lend support to their view of a robust current account surplus contributing to KRW strength. Coupled with continued structural inflows, market expectations of a political desire to implement an economic democracy, and a local economy gradually on the mend (they expect the policy rate to stay on hold this year), they believe USD/KRW could reach 1040 by H1 2013.
They see that key risks stem from FX intervention, macro prudential controls and JPY weakness. However, they believe that intervention will be aimed at smoothing volatility rather than targeting specific FX levels. They feel that the market is also well prepared for further FX controls in the event that KRW rebounds sharply, given official rhetoric has been hinting at this possibility since December. On the subject of JPY weakness, they feel that the impact on Asian economies could be overstated. Further, they suspect that the main catalysts for Yen weakness may be close to exhaustion in the near term. Having said this, they are keeping an eye out for a potential currency war.
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