Won bears bet even the most hawkish BOK will fail to match Fed

CURRENCY traders are betting there's more downside ahead for the beleaguered won as efforts by policymakers to stem its decline are outpaced by the Federal Reserve's most aggressive tightening campaign since the 1980s.

The won has slumped more than 16 per cent to 1,421.60 per dollar this year and forecasters including Bank of America predict it may weaken to 1,500 by year's end as traders focus on the widening yield gap with the US. Swap markets expect the Bank of Korea (BOK) to take its policy rate to 3.5 per cent in the next six months, a 14-year high, while economists are pricing in a peak of around 5 per cent for the Fed's benchmark in early 2023.

"Asian FX will be under pressure, leading to more rate hikes but they are still not doing enough," said Trinh Nguyen, a senior economist at Natixis in Hong Kong. "Asian central banks have been behind the curve as they have leaned on fiscal policy to do the heavy lifting of inflation fighting via subsidies and removal of tariffs, but with the energy crisis prolonged, the fiscal space has materially narrowed."

Nomura Holdings, Mizuho Financial Group and ING Financial Markets, which along with Bank of America are the most bearish, also expect the currency to weaken to 1,500, compared with the 1,450-per-dollar median forecast in a Bloomberg survey. Bank of America strategists including Claudio Piron and Adarsh Sinha said that won weakness will persist until the Fed stops hiking and China's economy reflates.

A slowdown in South Korean exports and dwindling foreign reserves are adding to bearish sentiment for the won. Most recently, a rare default on commercial paper by the developer of Legoland Korea spurred fresh concerns about the health of the country's credit market. Warnings about possible intervention from policymakers have failed to stem the won's decline.

"The main drivers for the won have been external until now, but domestic factors such as deficits and credit risks are starting to surface," said Park Sang-hyun, an economist at HI Investment & Securities in Seoul. Park expects the won to drop to as low as 1,450 this year as the risk of economic slowdown in China lingers.

Even if the domestic picture improves, analysts said the outlook for the won will be largely shaped by the actions of the Fed, which economists predict will hike by 75 basis points for the fourth time in a row when it meets later this week.

"I expect the Fed to deliver a fifth 75 basis-point rise in December after a fourth one next month," said Qi Gao, a foreign-exchange strategist at Scotiabank in Singapore, adding that under that scenario the Indonesian rupiah, the Thai baht and Korean won may underperform. BLOOMBERG



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