2014.02.28 KRW Outlook : likely appreciation as global safe asset

If the environment of competitions between USD and EM currencies like in 2013 depending on QE tapering in US, KRW would lose against USD under the woes about Chinese slowdown risks.

However, I don't think so. Because I focus on the worsening economic indicators in US as well. Actually, I've predicted US economy could pose to a downside risk because of 1) too rapid pace of stocking inventories in last 3 quarters compared with last 10 years, 2) labor market slack seen from Beveridge curve, increasing concerns about restrict income and consumption, and 3) decreased pending home sales for 4 consecutive months, for 2 consecutive months at that time that is a leading indicator of the housing demand.

Although some economists argued that recent weak data is on the harsh weather conditions, I think this effect is not entirely but referred factors combine with it as Yellen refered yesterday.

If US economy is worse than expectation, governors should use monetary policy toward easing finally. And when global money seek the safe assets, KRW would be one of them, I expext.

Since global financial crisis in 2008, the essential conditions for global safe assets became both of sustainable government debt to GDP and current account surplus. And KRW is sufficient for these two conditions.

2014.02.28 Market Review : Sell KTBf and Buy KOSPI by Foreign Investors

In NY market, UST prices were strengthened in line with soaring Ukraine and comments by Yellen, a chairwoman of Fed. In fact, almost decrease of UST rates depended on the news of Ukraine.

In Korea, industrial production in January published in the morning. It increased by +0.1% from last month, beating the consensus that it would be decline from a month earlier. Economists argued IP in January would decrease due to smaller working days because of Korean New Year’s Day in January this year. Governors said this indicator underpinned firm economic recovery in Korea.

Korean bond market showed low volatility under offset referred factors, strong UST price and solid IP in Korea. Foreign investors sold KTB 3yr futures by about 3,800 contracts worth of 380 bil. won while bought Kospi and its futures by about 230 bil. won and 170 bil. won, respectively.

KRW exchange rate closed at 1,067.5, lower than by 1.3 won from yesterday.

It’s likely to write these opposite directions between bonds and equities started from expectation of growth enhanced by firm IP in January.

But, I don’t think selling KTB futures is caused by economic indicators. I understand it’s just technical movement. Their accumulate position in this market is already about 1.4 bil. contracts worth of 14 tril. won much bigger than its historical average. And as Chinese government intervened their currency market and CNY weakened rapidly, local banks started to buy KTB futures at noon, but foreign investors did not. Finally, KTB 3yr future price closed 1 tick higher than yesterday.

I expect Korean bond market could continue to be robust in March as well. I think three factors could result in bond bull market. 1) I concern global economic slowdown in both US and China. Whether recent worsening US economic indicators are caused by harsh weather condition or not, the woes about economy are increasing. And especially in China, under the deleveraging pressure, growth outlook must have skewed toward downside rather than upside. 2) I concern Korean exports could face headwinds in line with those economic slowdown and KRW appreciation against JPY. 3) And last, low inflationary pressure is in 1H this year.

I target KTB 10yr yield at 3.35% at least similar with JPM forecast lower than today’s 3.497%.

I expect UST 10yr yield would drop further with a favor with safe asstes today.

Short sellers and long term investors such as NPS are already in the trap, I think. They may thought the cycle of monetary policy started to turn around. But, they hardly recognized the structural problems about external and domestic economy in longer term and the level of yield embraced those factors.

I will write the strategies in Korean bond market in terms of yield curve, credit spreads and so on over next time.