Why these two FX strategists are bullish on Korean Won

There has been a load of positive economic data coming out of South Korea recently, including strong growth in semiconductor exports, positive trends in manufacturing surveys, an increase in DRAM prices, upgrades in Kospi earnings, and colossal equity portfolio inflows.

Despite these catalysts, the Korean won has not seen a significant upside, remaining relatively unchanged against the dollar in recent weeks.

Nevertheless, FX strategists at UBS maintain an optimistic view on the won's prospects, and believe that it is "due for a catch-up."

“We note that Korea's weak Balance of Payments (BoP) have been a headwind for the won since early 2022, including in 2H23 when the tech cycle inflected,” UBS strategists Rohit Arora and Teck Quan Koh said in a note on Wednesday.

“This is however changing with the recent trend in modified basic balance surging above 2016-20 average. Fading seasonal dollar demand in the coming weeks, vis-a-vis January, could potentially catalyze won's overdue catch-up,” they added.

Along these lines, the strategists see the potential for the USD to weaken against the KRW to the 1,280 - 1300 range in the next couple of months, implying more than a 3% upside for the South Korean currency.

Similarly, Morgan Stanley strategist Chun Him Cheung shared this bullish sentiment toward the won, mainly because of robust inflows of foreign equity into S. Korea since the Corporate Value-Up program was introduced.

At the moment, the interest from foreign investors in Korean stocks is widespread across various sectors, not just limited to the electronics industry, which is typically the focus, he said.

“We believe the bullish sentiment on Korea equities will continue, at least until April 2024 when legislative elections in Korea are set to take place. We remain bullish on the Korean won,” Chun Him Cheung noted.

By Vahid Karaahmetovic

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