Fed rate hikes make outlook even worse for slammed South Korean won

[SINGAPORE] The South Korean won was Asia's worst performer over the last 6 months, and technical indicators suggest the misery isn't yet over. The won dropped to a 17-month low last week, breaching a key support level.

Other indicators, including the moving average convergence-divergence, suggest that the tech-dependent currency could slip further against the dollar.

The Bank of Korea (BOK) could give traders more reason to sell the won this Friday (Jan 14) if it disappoints the likes of Goldman Sachs Group and Citigroup, who are calling for a 3rd rate increase sooner than later. With the Federal Reserve turning increasingly hawkish, a hike may still not be enough to stem the currency's decline if the BOK signals a slowdown in policy normalisation.

"It appears that won is being impacted by higher US yields as well as foreign equity outflows," said Mitul Kotecha, chief EM Asia and Europe strategist at TD Securities in Singapore. "Pressure on tech stocks globally is also likely weighing on the currency. An absence of support from local exporters is keeping the door open to won downside."

A global selloff at the start of 2022 is weighing on Korea's tech-dependent market, which suffered a net outflow of US$21 billion last year. Treasury 10-year yields have surged to their highest since April, denting sentiment for emerging-market assets.

The dollar-won pair rose beyond 1,200.35 last week, its 2021 high, to touch 1,203.90. The next key level would be near 1,214.09, the 61.8 per cent Fibonacci retracement of the March 2020 to January 2021 decline.

Charts are also showing a bullish ascending triangle for the greenback against the Korean currency. Governor Lee Ju-yeol has previously played down the need to match the pace of the Fed's rate hikes, doubling down that domestic factors are more important considerations.

Any dovish rhetoric on Friday may help spur further won weakness, especially if investors react by paring back the 90 basis points of hikes they have priced in for this year.

A majority of economists expect the BOK to raise rates to 1.25 per cent in the first quarter, though their views are split on whether the move will come this Friday or at the next meeting in February.

The currency may find some respite near the end of the month. Local exporters who have accumulated a sizable amount of dollars may start selling ahead of the Lunar New Year, when companies exchange the greenback into the won to pay to employees, according to Min Gyeong-won, an economist at Woori Bank in Seoul.

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