USDKRW Near Term Depends On GDP Report
This week’s tentatively scheduled release of South Korean quarterly growth has far more implications for the future of the currency pair than most think. Although it is a GDP report just like any other, this quarter’s survey should give a clearer short term picture of the country’s interest rate future – on top of an earlier release of the country’s inflationary gauge.
According to market estimates, quarterly growth is anticipated to have slowed down to 0.5% in the third quarter as opposed to the second quarter’s more robust 0.9% quarter over quarter expansion. The lower figure would essentially pull down current forecasts of annualized growth of 4.5% set at the beginning of the year. Bank of Korea estimates are additionally expected to be cut from 4.3%, as a result of slowing growth and export demand in the European Union and United States.
So, then what can we expect when the GDP figures are actually released? Although the Bank of Korea, led by Governor Kim Choong Soo, is anticipated to keep rates at the current 3.25% for a fifth straight month, there are two scenarios to consider.
1. The GDP Figure is higher than 0.5%: A higher rate of expansion for an economy like South Korea could boost speculation that rates are on the rise. This would in turn support a lower USDKRW rate – lower than the current 1,133.25 exchange rate right now. But, any skyrocketing momentum would need a quarterly growth rate above 0.9%. Although a rate higher than 0.5% would be helpful, it may not justify a move by South Korean policymakers – even as inflationary pressures continue to remain above 4%. A large consideration of this is the Korean administration’s plan to keep consumer demand and consumption supported.
2. The GDP Figure is at 0.5% or lower: Should the GDP report prove analysts’ estimates correct – or move lower – this would lend to some near term selling of the South Korean won. Why? A good majority of the market is already expecting the country’s central bank to keep rates at their current standing, even though Governor Kim has already acknowledged the need to “normalize” interest rates. With a slow, but sure, decline in agricultural food prices and slowing export growth, a dip in the country’s expansion would be a nail in the coffin for policymakers looking to keep interest rates low. Plus, it would be hard to justify any restrictive monetary policy in the face of slower growth.
So, given the importance of the upcoming GDP figure, traders will be keeping their eyes on the newswire when the numbers are actually released. Incidentally, the release of the figure coincides nicely with a USDKRW rate that has hit a 1-month low.