BNY’s Head of Markets Macro Strategy Bob Savage said the Bank of Korea (BoK) may consider policy easing if Middle East geopolitical shocks weigh on domestic growth. He said the new BoK governor is prioritising market stability and is more tolerant of South Korean won (KRW) weakness.
South Korean President Lee Jae Myung instructed senior officials to take bold measures to address energy concerns linked to the war in the Middle East. He said the government may issue an emergency economic decree if needed.
Policy Signals And Market Stability
He downplayed foreign exchange risks and cited ample US dollar liquidity. He said exchange rate levels are not a concern if markets can absorb the adjustment, indicating tolerance for KRW weakness.
He said policy easing may be necessary as the Middle East situation adds to economic difficulties. He also said any inflation impact from an extra budget would likely be limited under its current scale and design.
The text also refers to foreign equity outflows and a relaxed response to KRW weakness. It says this affects the case for a bond-focused narrative as attention shifts towards oil shocks.
With Brent crude recently pushing past $95 a barrel, we are seeing clear signals that the Bank of Korea may consider easing its policy. The new governor’s focus on market stability, even at the cost of a weaker won, suggests a pivot is coming to shield domestic growth from the energy shock. This is a notable change from the more hawkish stance we saw throughout most of 2025.
Derivative Positioning And Rate Cut Risks
The official tolerance for Korean won weakness is a major development, especially as we recall the interventions when the USD/KRW pair pushed above 1,380 last year. This comfort with a depreciating currency, justified by sufficient dollar liquidity, gives a green light for traders to position for further downside in the won. Derivative traders should anticipate higher volatility and consider pricing call options on the USD/KRW.
Talk of emergency economic measures and a potential rate cut points directly to a shift in monetary policy. We saw the Bank of Korea hold its base rate steady at 3.50% for almost all of 2025, so a cut would represent a significant reversal. This outlook makes positions favouring lower short-term interest rates, such as in interest rate swaps, more compelling.
The combination of a dovish central bank and an external energy shock provides a clear strategy for the coming weeks. The path of least resistance for the won appears to be weaker, potentially testing the 1,420 level we haven’t seen sustained since late 2024. Therefore, derivative strategies that profit from a declining KRW against the dollar and falling Korean interest rates should be considered.
