HALISTER1: BOK RESEARCH ROUNDUP: Rate Cut Unlikely to Weaken Won For Long

BOK RESEARCH ROUNDUP: Rate Cut Unlikely to Weaken Won For Long

(Bloomberg) -- BOK’s unexpected rate reduction to record low of 1.25% is unlikely to weaken the won near-term due to limited room for further policy easing, analysts say.
  • Weakness over the longer term may resume ahead of an imminent Fed rate rise this year, they add
  • S.Korea unexpectedly cuts rate to support debt restructuring
  • BOK Governor Lee says decision was unanimous and economy isn’t showing clear recovery; adds Korea reaching lower rate limit
  • USD/KRW -0.1% to 1,155.70, erasing an earlier advance of as much as 0.3%
    • USD/KRW eyes 200-DMA resistance after BOK cuts rate, charts show
  • KRW onshore 2-yr interest-rate swap drops as much as 6 bps to 1.2850%, lowest on Bloomberg data dating back to 1999
  • Scotiabank (Gao Qi)
    • Knee-jerk response to rate cut is a weaker won, and the currency could underperform some regional currencies today
    • However, equity inflows will remain supportive until concerns over Fed’s tightening resurface
    • BOK will probably stay on hold in coming months
    • NOTE: Scotiabank’s economist Tuuli McCully predicted BOK’s rate cut today, according to June 3 research note; Scotia wasn’t included in Bloomberg survey of 18 analysts
  • Dai-ichi Life Research Institute (Toru Nishihama)
    • After today’s rate cut, investors may think BOK won’t be able to lower rates further while other central banks in the region such as Indonesia have room to ease policy
    • Won likely to outperform its regional peers on the back of this monetary policy outlook
    • Still expect won to decline vs dollar as expectations of a Fed rate increase grow again toward year-end
  • Capital Economics (Krystal Tan)
    • Further BOK rate cuts are possible in coming months even though Korean fiscal policy is expected to take the lead
    • Concerns about downside risks that corporate restructuring will pose to economy were likely a factor in today’s decision
    • Korean economy is already fragile and could use more support
    • NOTE: Industrial production dropped in April by most since July; inflation slowed to 0.8% y/y last month from 1.0% in April
  • Brown Brothers Harriman (Masashi Murata)
    • BOK’s unexpected rate reduction may spur expectations that export-driven Asian nations such as Taiwan, Singapore and Malaysia could seek a weaker currency
    • This is especially the case as doubts for stronger dollar is growing in the market
    • NOTE: Asian currencies strengthened vs dollar this month, led by yen, rupiah and won, as expectations diminished that Fed will raise rate as early as next week
  • Standard Chartered (analysts including Chong Hoon Park)
    • Long-end rates will likely fall further to new all-time lows given market expectations of one more rate cut in 2H
    • Maintain positive outlook on Korea Treasury bonds on sluggish growth and inflation outlook
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Chong Park (Standard Chartered PLC)
Krystal Tan (Capital Economics Asia Pte Ltd)
Masashi Murata (Brown Brothers Harriman & Co)
Qi Gao (Bank of Nova Scotia Asia Ltd/Singapore)
Toru Nishihama (Dai-ichi Life Research Institute Inc)

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