South Korean Won Expected to Strengthen Amid Central Bank Support

Key Takeaway

• The South Korean won is expected to strengthen to 1,335 per dollar by year-end, buoyed by central bank support and rising exports.
• Despite broader pressures on emerging Asian currencies, recent economic data shows South Korea's GDP grew by 3.4% in Q1, beating expectations.
• Global rate cut expectations are being adjusted due to persistent US inflation, impacting central banks' policies worldwide.

Central Bank Support Boosts Won

The South Korean won has shown signs of recovery, bolstered by central bank support and an uptick in exports. After a decline to its lowest level in over a year at 1,400 per dollar, strategists are optimistic about the currency's future. A recent trilateral meeting between finance chiefs from South Korea, Japan, and the US has increased confidence in Asian currencies' defense against depreciation. Christopher Wong, an FX strategist at OCBC in Singapore, highlighted the psychological resistance at the 1,400 level for the dollar-won pair, suggesting a potential strengthening of the won to 1,335 per dollar by year-end. This optimism is further supported by an improving demand for South Korea's tech products and the anticipated easing cycle of the Federal Reserve.

Emerging Asian Currencies Face Pressure

The broader context of emerging Asian currencies nearing multi-year lows against a strong dollar is challenging. With the US Federal Reserve's interest rates expected to remain high, there is a growing anticipation of local authorities taking action to support their currencies. However, Alvin Tan, head of Asia FX strategy at Royal Bank of Canada, expressed skepticism about the Bank of Korea maintaining a strict defense of the 1,400 level, attributing the won's depreciation to broader USD movements rather than local factors alone.

Economic Indicators Show Promise

Recent data has provided a glimmer of hope for South Korea's economy and, by extension, the won. The nation's exports in the first 20 days of April saw an 11% increase from the previous year, and the first-quarter gross domestic product grew by 3.4%, surpassing the 2.5% growth expected by economists. These positive indicators have led strategists like Eddie Cheung from Credit Agricole CIB to predict a strengthening of the won to 1,350 per dollar by year-end, reflecting a more positive outlook on the South Korean economy.

Global Central Banks' Rate Cut Expectations Adjusted

The global financial landscape is adjusting to the persistent inflation challenges in the US, affecting expectations for interest rate cuts by central banks worldwide. James Knightley, chief international economist at ING in New York, noted the global dimension of the Fed's inflation problems, impacting the European economy and limiting other central banks' ability to reduce rates. Despite differing inflation dynamics in Europe and the US, the market has adjusted its expectations for rate cuts by the European Central Bank and the Bank of England, reflecting the interconnectedness of global financial policies and the influence of the US Federal Reserve's decisions.

Street Views

• Christopher Wong, OCBC (Bullish on the South Korean won):

  "The 1,400 level should cap upside in dollar-won for now."

• Alvin Tan, Royal Bank of Canada (Neutral on the South Korean won):

  "I don’t think it will try to hold a firm line when it is part of a broader USD move."

• Eddie Cheung, Credit Agricole CIB (Bullish on the South Korean won):

  "The won may gain to reflect our more positive fundamental view of the economy... The won may rise to 1,350 per dollar by the year-end."