Wednesday, November 2, 2011

Today's Major Market Move: South Korean Won Strengthens 6.7% vs. the USD Since Oct 1st

Since the beginning of Oct, the best performing currencies against the US Dollar have been the Uganda Shilling, the Australian Dollar and the South Korean Won. We recently wrote about the Aussie Dollar here and in this post we're going to take a further look at the Won. Here's the table of the best performing currencies since Oct 1:

Click here to go to a live version of the table.

The Won has been on quite the roller coaster ride since Aug 1, swinging from 7% stronger to 6% weaker and then back to even for the year. Here's a chart of USDKRW alongside the USDJPY and USDEUR crosses (by % change):

Click here to go to a live version of the chart.

The benchmark interest rate in Korea is currently at 3.25%. Being an export economy, if the currency were to strengthen further on its current trend, one might expect the Koreans to cut rates to prevent the currency from strengthening further. However, weighing against that decision is the fact that South Korea is currently dealing with relatively high consumer price inflation of 4%. Throw in a high household debt-to-income level of 155% and the market expectation for the next move by the BOK is to be a rate rise. From the WSJ:
A major shock to Korea’s economy such as severe contagion from the euro-zone sovereign debt crisis or a collapse in exports along the lines of the crunch in 2008 could push the BOK into action. But barring a crisis, the BOK’s bias on rates remains upwards.

“As anchoring inflation expectations has become a policy priority for the Bank of Korea, its next move is a hike, even if not any time soon,” said HSBC economist Ronald Man

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