USD/KRW Finds support Ahead of CPI
USD/KRW is marginally higher on Tuesday as the market counts down to tomorrow’s hotly-anticipated inflation data in the US.
The South Korean Won is changing hands at 1,302.80 against the US dollar, up around 3.90 (+0.30%) at the start of the Asian trading day.
Should the pair hold on to the early gains, it will snap the won’s four-day winning streak against the greenback, which has helped it recover 1% from last week’s lowest point.
Like many Asian currencies, the Korean won has fared poorly against the dollar in 2022. Despite the recent pullback, USD/KRW is is up 10% year-to-date.
The gains have been fueled by a combination of dollar strength and the won’s weakness. The buck has seen strong inflows over the last 8 months, helped by the Federal Reserve’s aggressive rate-hike regime. Not to mention, continued safe-haven buying at the expense of weaker currencies.
The Bank of Korea (BOK) raised interest rates by 50 basis points for the first time in history in July, raising the benchmark borrowing rate to 2.25 percent. So far, the move has kept the won from falling further. As a result, the the currency gained around 2% in the three weeks following the historic policy change. Nonetheless, the BOK faces an uphill battle defending the country’s weakening currency.
Korean State Pension Fund
The Korean State Pension Fund, the third-largest in the world, has been dumping won at an alarming rate this year. As part of the its plans to diversify its equity portfolio, the asset manager is upping its stake in US stocks and bonds. In order to purchase the dollar-denominated securities it must first sell the Korean won.
The country’s trade deficit is growing at an alarming rate as a result of constant selling pressure on the won. However, analysts at MUFG bank believe the worst is over for the underdog:
“…we expect a continued recovery in consumption, offsetting part of the potential weakness in external demand due to slowing growth in the US and EU. Recovering domestic demand will likely encourage foreign capital to continue returning to Korean markets. In addition, this better-than-expected Q2 GDP print could allow the BOK more room in hiking rates for the purpose of taming inflation, which could help with Korea’s government bond yield spreads with the US.”
US Dollar to Korean Won Outlook
The daily chart shows some interesting developments.
We can see that USD/KRW has formed a head-and-shoulders formation, propped up by a rising trend line. Technically speaking, the trend line should provide good price support at the 1,300.00 level. With this in mind, the pair may trade higher towards the peak of the right shoulder at 1,315.00.
However, a close below the trend line brings the 50-Day Moving Average (DMA) at 1,293.50 (green line) into play. Whereas a steeper decline, could see the won strengthen to the 100-DMA at 1,270.00 (blue line).