The Bank of Korea’s policy meeting tomorrow couldn’t come at a better time. As the won slid to a one-year low last week, traders will wait to see if the central bank delivers another hawkish signal to temper the slide.
Until last week, expectations the BoK is on the cusp of its first rate hike in 2018 largely buffered the won from the impact of rising US rates and the escalating Sino-American trade war. But as Treasury yields soared to seven-year highs and global stock markets tanked, the won may be capitulating.
Renewed won weakness may further stoke price pressures after the September inflation rate accelerated towards the BoK’s 2% target. Governor Lee Ju-yeol reiterated this month the central bank’s stance to reduce policy accommodation to address mounting financial imbalances.
With the interest-rate market almost fully-priced for a 25 basis point hike by year-end, all eyes are on the October 18 meeting to see if the central bank will act now or wait till next month. Economists are split. The BoK last raised its seven-day repo rate in November, boosting it by 25 basis points to 1.5%.
The merits of a stable won can’t be underestimated as the US releases its semi-annual foreign exchange-manipulator report in coming days. South Korea, along with China, were on the watch list in April’s report. There’s concern China may be finally labelled a currency manipulator although the US Treasury staff is said to have advised Secretary Steven Mnuchin that isn’t the case. “I expect BoK to give a hawkish signal in October and raise rates in November,” said Min Gyeong-won, an economist at Woori Bank in Seoul. “The won will probably be bought on the back of a rate hike combined with the US FX report,” which tends to push currencies up against the dollar, he said.
The won fell to 1,144.75 per dollar on October 11, its weakest level since September 2017. Yet, it has lost just 0.5% in the past three months while the yuan has dropped around 3%. 
It’s also far more resilient than Indonesia’s rupiah and the Indian rupee which both sank more than 5%.
Near-term upside in the dollar-won appears limited by resistance around 1,157.90-1,162.98, an area covering the highs in March and July 2017.
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