2015.07.21 Daily

US treasury yield curve flattened last night in line with the expectation of Fed’s rate hike and short-end bond price was down. In terms of US rate hike, USD continued to strengthen and oil price was down, either. Contrary to bear market in US treasury, German bund rate rallied further following last week in line with the procedure of Greece’s deal with creditors.

Range movement in global bond markets would be continued with somewhat volatility and it would be underpinned by weak inflation expectation with low oil prices. Some analysts including Barcap argued that the inflationary pressure would be subdued in this summer with seasonal effect. Someone sees the Iranian deal with US as the willingness of US that does not want oil prices to be accelerated further. In this case, the oil market could lose the upside momentum for some time and this could cause the disinflationary pressures.

However, unless oil price moves toward much lower than current level, main focus would be on the effect on consumption side. Maybe in line with Yellen’s thought, earlier step in lowering oil price, people used to increase their saving, not consumption because the volatility means uncertainty for economic and sentimental factors. After lowering movement, however, if the momentum is moderate, individuals could increase their consumption demand due to expended disposable income from lower energy prices. This means reflation or possible demand side pressure to inflation. So, I expect global yield curve to steepen quickly at the end of this year.

On the other hands, how is the Korean bond market? Recently, KRW depreciation against USD is the hottest spot in the market. In currency market, fair value could be hardly calculated by fundamental analysis, so market players see the momentum mainly. They often see the three factors and say if those all factors indicate same direction, the momentum would be very strong. Those factors are the willingness of government, consensus by foreign investors, and supply and demand factor. And now, Korean government pursues to accelerate external investment from domestic capital and recently announced the policy to boost capital outflow despite the effectiveness of this is somewhat skeptical. And foreign investors focused on USD appreciation now. They seem to use short position in KRW because the yield spread between US and Korean treasury would continue to be narrowed ahead of Fed funds rate hike, and carry cost using KRW is relatively cheap. And last, supply of USD would somewhat limited because the export economy has been deteriorated recently and demand side of USD could increase in line with investment abroad and temporary demand for FX hedge in Chinese equity fund. In Chinese equity fund, if the price tumbles seriously, the demand for buying USD should increase.

Considering those three factors, KRW faces headwind against appreciation. Market players likely want to see the peak of the price. While the downward pressure of KRW, the bond sell-off by foreign investors is not strong yet. This is main different point in case of last currency shock. Some foreigners sold the KRW bond, but it seemed not as the trend yet. Rather, in KTB futures market, foreign investors started to buy both of 3 and 10 year futures. They seem to think current KRW depreciation would not mean a sort of crisis in Korea, and should get the chance for the timing to buy Korean assets.

How is the level? In a chart, the ceiling seems to open much higher, so it would be difficult indicate the target level accurately. But, in longer term chart, for example in the monthly chart, we could see the negative and thick leading span, and the lagging span meets the main moving average line and negative and thick leading span as well. So, I forecast the peak price of USD/KRW would be about 1,170 won. Now, it is about 1,159 won, so it seems very close to peak-out. If then, the winner would be the foreign traders who are buying KTB futures recently. Although Korean bond rate could be pushed higher, they could gain from FX positions with KRW appreciation, I guess.