The United States and South Korea have finalised a comprehensive trade agreement. South Korea will contribute $350 billion to U.S.-owned and controlled ventures, as chosen by the U.S. President.
Additionally, South Korea will buy $100 billion in LNG or other energy products from the U.S. Details on a further investment will be disclosed in two weeks during a White House meeting with President Lee Jae Myung.
Trade Details and Tariffs
South Korea will fully open its markets to American trade, encompassing sectors such as automobiles, agriculture, and trucks. A 15% tariff will be imposed on South Korean goods entering the U.S., whereas American products will enjoy tariff-free access in South Korea.
The announcement was made by Trump through his social media platform.
Given today’s date, the immediate reaction should be in the currency markets. We see a significant weakening of the South Korean Won against the U.S. dollar as a near certainty. With the USD/KRW exchange rate hovering around 1,390 in recent weeks, we should consider long positions on the dollar, anticipating a move well past the 1,450 mark.
We anticipate a sharp downturn in the South Korean stock market, specifically the KOSPI index. Derivative traders should look at buying put options on ETFs like the iShares MSCI South Korea ETF (EWY), which has seen modest gains year-to-date. This news will particularly punish South Korean automakers like Hyundai and Kia, who sold a combined 1.6 million vehicles in the U.S. in 2024, as a 15% tariff would severely damage their competitiveness.
Impact on Energy and Automotive Sectors
The $100 billion commitment to U.S. energy is a massive tailwind for our LNG exporters. Considering U.S. LNG export capacity has already surpassed 14 billion cubic feet per day this year, this deal represents a substantial, long-term demand increase. We should be buying call options on major players like Cheniere Energy (LNG) and other natural gas producers who stand to benefit directly.
With South Korea fully opening its markets, we should expect a boost for U.S. automakers and agricultural firms. The elimination of tariffs on American goods makes them more competitive against domestic Korean products. We can look for upward movement and consider call options on companies like Ford (F) and agricultural ETFs like the Invesco DB Agriculture Fund (DBA).
The $350 billion investment fund creates a layer of uncertainty, as the targeted companies are unknown. This ambiguity, coupled with another announcement in two weeks, will likely increase market volatility. Traders might consider buying short-dated VIX call options to hedge against or profit from a potential spike in the CBOE Volatility Index.
We’ve seen a version of this before during the 2018 renegotiation of the KORUS agreement. That period saw threats of tariffs on automobiles which created significant swings in related stocks. This deal is far more dramatic, suggesting the market reaction will be proportionally larger than what we observed back then.
