FXstreet.com (Barcelona) - Nomura FX Strategists Craig Chan, Prateek Gupta and Prashant Pande note that Korea's December FX reserve data showed a surprisingly small monthly headline gain of USD0.9bn to USD326.9bn (against a USD2.6bn gain in November). After adjusting for FX valuation and coupon payments, the month-on-month gain was also slight, at USD0.2bn (USD3.2bn in November).
They suspect that the conclusion may be that there was limited FX intervention in December, but the reality is that intervention may have been carried out primarily in the FX forward market. Unfortunately, the Bank of Korea's FX forward book data is only up to November, but they feel that it is very indicative of a pick up in intervention. The BoK's forward book rose by USD 6.6bln in November, the largest monthly gain since April 2011.
They are currently short USD/KRW (and long Asia FX) and see near term risk in the rise in UST yields and the bid in broad USD following some Fed members indicating that QE may slow or stop well before the end of 2013". Although the sensitivity of changes in USD/KRW to the rise in UST yields (or broad USD) in the past month has been very weak, the risk is that the sensitivity picks up if UST yields and the broad USD continue to rise rapidly.
Another area of risk they see is in FX intervention/macro prudential controls from local authorities. In the very near term they see USD/KRW at 1060 as the next level to be held by authorities and a further tightening of regulations in the FX forward market is still possible.
A final risk they see is the recent sharp bout of JPY depreciation against KRW appreciation, though with KRW remaining broadly undervalued, the JPY/KRW cross still above a 12-figure (having averaged about 9.2 in the five years before the 2008 crisis), and with Korea having made significant competitive gains over Japan in the past 10 years - it is no surprise that local authorities have said they are more concerned over the pace of KRW appreciation than the actual level.
With price action in USD/KRW still favourable and given that it may be a bit early to position for a Fed exit scenario, the team have decided to add to their existing long KRW cash position given structural inflows, strong current account surplus and market expectations of a political desire to implement an 'economic democracy'. They finish by adding, "Also, note that Nomura US Economics forecasts weak US growth in the early part of this year (largely related to the fiscal cliff), which could limit expectations of a near-term Fed exit from QE."