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."