Credit Agricole Bets Korean Won Will Weaken as SocGen Sees Drop

  • Korean currency advanced to five-month high on Wednesday
  • BOK said this week it sees room for more monetary easing

Credit Agricole CIB and Societe Generale SA are betting the won’s advance to a five-month high won’t be sustained on signs the Bank of Korea will cut interest rates and an emerging-market rally is faltering.

South Korea’s central bank lowered growth and inflation forecasts on Tuesday as it held its benchmark rate at a record-low 1.5 percent, with Governor Lee Ju Yeol saying there is still room for easing. The Shanghai Composite Index fell the most in seven weeks on Wednesday on speculation data that’s showed a stabilization in China’s economy may deter authorities there from expanding stimulus. China is South Korea’s largest export market.

"The recent emerging-market rally has gone a long way and is showing signs of taking a pause with Chinese equities tumbling," Gary Yau, a strategist at Credit Agricole in Hong Kong, wrote in a note Wednesday. The BOK’s "latest dovish twist" is another factor that will weaken the won, he said.

The currency rose 0.2 percent to close at 1,133.07 a dollar, according to data compiled by Bloomberg. The won strengthened to 1,128.43 on Wednesday, the strongest since Nov. 4, and has advanced 3.5 percent this year. A gauge of emerging-market currencies has climbed around 8 percent since mid-January on a dovish Federal Reserve and a rebound in commodity prices.

Any further gains in developing-nation exchange rates will be dependent on recoveries in economic growth, which is unlikely based on recent cyclical indicators, Jason Daw, head of Asia foreign-exchange strategy at Societe Generale in Singapore wrote in a note on Wednesday. Investors should position for a weaker won via a call spread, involving the simultaneous purchase and sale of call options with different strike prices, he wrote.

Credit Agricole recommends a trade selling the won against the dollar via three-month non-deliverable forwards, with an entry level of 1,132.63 and a target of 1,170. The lender forecasts the Korean currency will drop to 1,180 a dollar by the end of June. That compares with the median estimate of 1,178 in a Bloomberg survey.

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