Potential for further KRW weakness and JPY strength - ANZ

Khoon Goh, Head of Asia Research, suggests that given the ongoing geopolitical uncertainty in the Korean peninsula, there is potential for further KRW weakness and JPY strength.

Key Quotes

“Since the 28 July missile test by North Korea, geopolitical tensions have intensified. The United Nations has imposed new sanctions on North Korea, but the dialling up of the rhetoric is what has spooked markets. Korean sovereign CDS spreads have widened, the KOSPI has declined and the Korean won has been the worst performing regional currency so far this month.”

“Adequately pricing-in geopolitical risks is difficult. And, in the past, Korean markets have recovered once tensions have de-escalated. But North Korea’s threat to fire missiles into the waters near Guam is not helping the situation.”

“In the last three weeks, USD2.7bn of foreign investment has flowed out of the Korean equity market. But, in that period, foreign bond purchases remained robust. This makes sense from a traditional risk-off type environment where we normally see a rotation out of equities and into bonds. But in this current situation, there is the potential for bond outflows if tensions escalate, especially given the strong USD13bn of foreign inflows into the Korean debt markets so far this year.”

“JPY is a traditional safe-haven currency, and it is no surprise that the yen has rallied on the back of the North Korean situation. Further escalation should see the yen outperforming in the near term, especially with the month of August traditionally seeing yen strengthen, even in the absence of risk aversion.”