Halfway through July, the top three currencies were the KRW (+3.9%), NZD, (+3.0%) and GBP (+2.1%), the same currencies that were pressured by the hawkish June 16-17 FOMC meeting. Following the cooler US CPI and PPI inflation readings in June alongside markedly lower energy prices, markets have reduced the probability of a September Fed hike to 43.6%. Conversely, the Bank of Korea delivered its widely expected rate hike today, with markets also fully pricing a second Reserve Bank of New Zealand hike on September 2. At the European Central Bank Forum in Sintra, Bank of England Governor Andrew Bailey reckoned Fed Chairman Kevin Warsh’s hardline rejection of forward guidance will be impractical and difficult to enforce in modern markets.
The KRW’s outperformance this month was attributed to the Nasdaq ADR debut of a top South Korean semiconductor manufacturer on July 10, which drove USD30bn in capital inflows and offshore fund repatriations. South Korea is seeking developed-market status in the MSCI Global Index in 2027. The country launched a 24-hour onshore spot USD/KRW trading system on July 6 to address the accessibility issue as a factor in maintaining South Korea’s Emerging Market status in MSCI’s June 23 Annual Market Classification Review. We expect the BOK to leave the door open for another hike this year after today’s expected 25-bps increase to 2.75%. Overall, we were happy with our strategic trade idea in the FX Quarterly: buying KRW at its deepest undervaluation since 2029. USD/KRW has retraced 50% of its US-Iran war-driven rise from 1420 to 1560, near our end-3Q26 target of 1470.
Our other trade idea favouring the NZD’s asymmetric relative value among its commodity-led peers has also fared well. NZD/USD has recovered to 0.5850 from the year’s low of 0.5626 on June 26. The market is expecting the RBNZ, which delivered its first hike in three years on July 8, to mirror the Reserve Bank of Australia’s three rate hikes in February-May. RBNZ Chief Economist Paul Conway warned that the central bank may need to recalibrate back toward a neutral interest rate setting because businesses are passing cost increases to consumers. Hence, the market sees scope for the official cash rate, currently at 2.50%, needing to rise to the top of the official inflation target band of 1-3% by the end of this year.
Quote of the Day
“Now I am become Death, the destroyer of worlds.”
J Robert Oppenheimer
July 16 in history
In 1945, the United States successfully detonated the world's first nuclear weapon, codenamed "Trinity," in the Jornada del Muerto Desert in New Mexico.
Topic
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