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Won holds near one-year lows after Bank of Korea rate hike
BBH said the BoK guidance shift and swaps pricing point to a higher policy path, supporting expectations for additional won-supportive inflows.
Brown Brothers Harriman’s (BBH) Elias Haddad flagged USD/KRW trading near a one-year low following the Bank of Korea’s back-to-back 25 basis point hike to a base rate of 3.00%. BBH noted that while some guidance was tempered, the implied policy direction from officials and derivatives markets was firmer.
BBH cited the BoK’s revised language, which removed wording tied to the need for further rate hikes and instead said the central bank would set the timing and pace of additional base rate increases based on incoming data. BBH also pointed to the central bank’s six-month ahead conditional policy rate projections, showing outcomes clustered around 3.50% and 3.25%.
The firm said swaps pricing suggests a policy rate closer to 3.50% over the next six months and 3.75% over the next 12 months. BBH added that Korean won fundamentals look supportive, with it describing the won as undervalued and citing South Korea’s large current account surplus of 9.4% of GDP in Q1.
BBH further argued that full inclusion in the WGBI by November should sustain foreign bond inflows, while the BoK has scope to deliver more hikes. The combination is expected to help underpin the won even as USD/KRW stays near its lows.