European sovereign debt contagion risk and fear of Greek default hit risk sentiment as well as the Asian emerging market currencies and the South Korean Won has been one of the worst performers over the month among the 10 most actively traded Asian currencies. Foreign investors have been net sellers of Korean stocks. The Korean money market curve is currently pricing less than two 25bp hikes over a year despite headline CPI entrenched above the central bank’s 4% threshold.
Notwithstanding the recent sell-off in the Korean Won, long-term trend remains supportive of stronger Won on the back of faster economic growth, higher interest rates as well as healthier government finances in Korea. The BoK along with the PBoC has been more willing to let their currency appreciate against the dollar to curb imported inflation as well as smoothen currency volatility. On the other hand, the US Fed vowing to keep funds rate at historic lows and continue to provide monetary support as well as ballooning US fiscal deficit are dollar bearish. Senior EFSF officials recently noted that China is expected to buy a “strong proportion” of the Portuguese bail-out bonds during next month’s auctions as a way to diversify Chinese asset holdings thereby putting a floor beneath the Euro and the Asian currencies.
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