South Korea\u2019s won strengthened against the US dollar after the Bank of Korea lifted its policy rate by 25 basis points to 2.75%, its first rise in three-and-a-half years. In Asian trading on Thursday, USD\/KRW pared early gains and eased towards 1,484.68. The won has outperformed the greenback for over two weeks, with markets having already priced in the BoK move.<\/p>\n
The US dollar steadied after two sessions of heavy losses, with the Dollar Index (DXY) edging up to around 100.50. The pullback followed softer US inflation readings at both retail and wholesale levels, prompting a rethink of Federal Reserve rate expectations. CME FedWatch puts the probability of a July Fed hike at 10.2%, down from 31% a week earlier.<\/p>\n—\n
We see a clear divergence between the Bank of Korea’s hawkish move and the market’s softer expectations for the Federal Reserve. With the BoK raising its rate to 2.75% and signaling more to come, the path of least resistance for the USD\/KRW pair appears to be lower. This policy gap is the primary driver for our strategy in the coming weeks.<\/p>\n
The BoK’s resolve is reinforced by recent data showing South Korean core inflation remaining sticky at 3.1%, justifying their concerns about demand-side pressures. Conversely, the latest US inflation figures coming in below expectations at 2.9% have caused traders to rapidly price out a Fed rate hike this month. This fundamental data supports a continued strengthening of the Won against the Dollar.<\/p>\n—\n
Our view is that the market was already positioned for this move, as the Won has been outperforming for over two weeks. This pattern is reminiscent of previous cycles where the US Dollar peaked once other central banks began their own aggressive tightening campaigns. We anticipate this trend will gather momentum as interest rate differentials shift in favor of the KRW.<\/p>\n
In response, we are looking at purchasing USD\/KRW put options with expirations in late August and September. This strategy allows us to capitalize on further downside in the pair while defining our maximum risk to the premium paid. It provides an efficient way to position for a drop towards the 1,450 level we are targeting.<\/p>\n\n\n\n