As the threat of war abates, the Korean Won should continue its climb through 2018.
The threat of war may not be completely out of the picture, but we expect the Korean Won (KRW) to continue to strengthen though 2018 as the country experiences faster economic growth and inflation nearing the Bank of Korea’s 2% target. In November, the BOK increased interest rates from 1.25% to 1.5% for the first time since 2011 and the first by a major central bank in Asia since 2014.
South Korea’s economic recovery has been driven by exports, especially of semiconductors, cars and petrochemical products while domestic consumption remains modest given the nation’s record level of household debt. We expect global demand for South Korean technology products, cars and petrochemical products to continue to increase fuelling demand for the won. A stronger won reduces export competitiveness for local manufactures.
Since North Korea’s positive New Year message to South Korea, tensions between the two nations have decreased to the point that we believe that investors can put aside North Korea risk. However, investors will still need to contend with more exchanges between North Korea and the U.S. Therefore expect some volatile trading during these periods of exchanges.
Overall, we see the won increasing over 2% against the USD in the next 12 months as the economy expands and demand for South Korean exports increase. However, as the economy recovers and inflationary pressures increase, a risk will be that domestic prices will rise too quickly putting additional pressure on heavily-indebted households. If the won increases too quickly, we expect the BOK to consider measures to boost capital outflows in order to keep exports competitive and to ensure inflation stabilises within its target range.