The South Korean won depreciated as the trade deficit widened. The strong correlation between the trade balance and the KRW means the won is likely to appreciate as the trade deficit narrows, Standard Chartered economists report.
Widening trade deficit weighs on KRW
“Counterintuitively, we found that trade balance has a much higher correlation with KRW than C/A balance. This strong correlation may partly explain KRW’s recent weakness and implies that KRW is likely to appreciate when the trade deficit narrows.
“We do not expect the trade account to turn supportive of KRW in the near term. Slowing global growth and external demand will likely keep the trade account under pressure, outweighing the benefits of a decline in commodity prices. raw.
“We highlight a notable improvement in Korea’s capital account. Korean retail purchases of foreign equities have slowed and foreign flows into Korean equities have recovered, improving net equity flows after a sharp deterioration over the past two years.
“We think the improving capital account could allow KRW to start outperforming its peers, although overall USD strength and low risk sentiment are likely to keep USD/KRW supported in the near term.”
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