Korea’s industrial production growth saw a rebound in December, suggesting strong export growth. This has contributed to the KRW appreciating against the USD this week.
President Lee has suggested the possibility of a supplementary budget. This could support various sectors, including culture, arts, and new startup initiatives.
Possible Budget Implications
The budget could be financed by either Korea Treasury Bond issuance or an increase in tax revenues. This move may bolster Korea’s growth prospects, aligning with the Bank of Korea’s recent neutral stance.
Looking back, we recall the discussions in early 2025 about a potential supplementary budget and the upside it signaled for the Korean won. That budget did materialize in the second half of the year, contributing to a 12% surge in tech exports in the third quarter of 2025. This initially strengthened the won, pushing the USD/KRW pair down toward the 1,330 mark during last autumn.
However, the positive sentiment faded as global growth concerns mounted towards the end of 2025. The latest industrial production figures for December 2025 showed a 0.4% month-over-month decline, surprising many who had expected continued expansion. This slowdown suggests the export-led boost we saw previously may be losing steam heading into the new year.
Risk Profile and Currency Implications
For the coming weeks, this creates a different risk profile than what we saw for most of 2025. With the USD/KRW now trading near 1,390, traders should consider that the path of least resistance may be higher. Buying USD/KRW call options could be a prudent way to position for potential further weakness in the won, especially with a strike price around 1,410.
The Bank of Korea’s pivot to a neutral stance was a key theme last year, but that is now under review. Inflationary pressures have eased, with consumer prices rising only 2.3% year-over-year in the fourth quarter of 2025, well below the highs seen previously. This shift increases the probability of a rate cut by mid-2026, putting more upward pressure on the dollar-won exchange rate.
