KRW outlook; Further Asia easing ahead

The IDR has room to strengthen vs the KRW. Asia central banks are going to ease further.
Philip Wee, Eugene Leow19 Jul 2019
    Photo credit: AFP Photo

    FX: KRW outlook vis-a-vis IDR

    The Indonesian rupiah continues to be favoured over the South Korean won after their rate cuts on July 18. The Bank of Korea’s decision to lop 25 bps off its 7D repo rate to 1.50% came earlier-than-expected but Bank Indonesia’s 25bps cut to 5.75% was considered a long-awaited event. Our economist expects one more BOK cut in 4Q19 and the next BI easing in 2020. The BOK’s decision to downgrade its 2019-2020 growth and inflation outlook underscored the need to cushion growth against risks posed by Japan’s export ban on key components needed by its semiconductor industry. BI is looking for the Fed’s upcoming insurance cuts to provide a benign US dollar environment for more easing to lift growth. The KRWIDR cross rate, last at 11.86, has scope to fall to 11.30.

    Rates: Further easing in store for Asia central banks

    The Bank of Korea (BoK) and Bank Indonesia (BI) joined the easing bandwagon, cutting their respective policy rates by 25bps this week. The BoK and BI joins the ranks of other Asia central banks (India, the Philippines and Malaysia) in taking steps to cushion economic growth amid persistent growth challenges. More importantly, the U-turn from the Fed and the European Central Bank (ECB) over the course of the past year has led to much more benign global financial conditions. As developed market rates push lower, it provides increasing leeway for Asia central banks to cut rates. This is true for twin deficit economies which have to be more opportunistic when it comes to easing policy.

    We think that the wave of easing has further to go and this should be supportive of Asia govvies in general. Over the coming few quarters, we can expect more rate cuts from India, Indonesia, Malaysia, the Philippines and South Korea. Thailand and Taiwan buck the trend, but we suspect that pressure to loosen policy could build in the coming months. Similarly, expectations for slope flattening from the Monetary Authority of Singapore (MAS) in October have spiked after the weak non-oil domestic export (NODX) figures dashed hopes for an upward revision in already dismal 2Q GDP numbers. Lastly, we think that China govvies are attractive and have probably not factored in the likely measured easing ahead.

    Philip Wee

    FX Strategist - G3 & Asia

    Eugene Leow

    Rates Strategist - G3 & Asia

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