Asia's Worst Currency May Continue Its Slide, Deutsche Bank Says

(Bloomberg) -- The worst may not be over for the Korean won, according to Deutsche Bank AG.

The currency, Asia’s worst performer this year, may keep slipping until it hits 1,200 against the dollar as growth concerns and disappointment over the size of a supplementary budget sap confidence, said Choi Kyungjin, head of fixed income and currencies at the bank in Seoul.

“In the short term, market sentiment is pretty bad -- there is no confidence in the economy,” Choi said in a recent interview. Markets will have to wait for the semiconductor industry to rebound, while the automobile and shipbuilding sectors remain sluggish, he added.

Asia's Worst Currency May Continue Its Slide, Deutsche Bank Says

Bets that the Bank of Korea will cut rates have increased after data last week showed the economy unexpectedly shrank in the first quarter on falling exports and weak demand for semiconductors. The won breached a key support level that day, and has extended losses to trade at a more than two-year low.

Traders have been bidding up the dollar against the won recently with no strong resistance seen until the 1,200 level, Choi said. The authorities, including the central bank and the finance ministry, will probably provide support for the Korean currency, he said.

The won fell 2.8 percent against the greenback in April. It traded at 1,165.70 at 3:19 p.m. in Seoul on Thursday. Yields on the three-year bond have dropped 39 basis points from an October high to 1.695 percent, hovering below the Bank of Korea’s 1.75 percent policy rate.

Rate-Cut Bets

A rate cut could come as early as July, though the BOK could wait until the fourth quarter to better assess the growth momentum, Choi said, expressing a personal view. Deutsche Bank’s official call is for the central bank to hold rates this year.

Given the balance for risk-rewards, investors may want to hold back on buying more bonds until at least June, he said.

There are signs that the export slump is bottoming out. Shipments fell 2 percent by value in April from a year earlier, better than the 5.9 percent decline expected. Meanwhile, Samsung Electronics Co. on Tuesday joined rivals in predicting a rebound in semiconductor prices in the second half.

BOK Governor Lee Ju-yeol reiterated on Wednesday that the economy is expected to improve in the second quarter, and that the central bank isn’t considering a rate cut at the moment.

The government last week announced plans for an extra budget of 6.7 trillion won ($5.8 billion). Approval by parliament could be delayed though, according to Choi, pointing out that that could be another reason for the BOK to lower rates sooner. It took more than a month for the national assembly to sign off on the supplementary spending last year.

If economic data don’t show a significant improvement in the second quarter, there’s a higher chance for the BOK to ease in the following three months “whether they like it or not,” said Choi.

©2019 Bloomberg L.P.