As inflation in the US is stabilizing and the job market seems to be gradually slowing down, markets are betting on a rate cut by the Federal Reserve in the second half of the year.
The Korean won's exchange rate with the US dollar and Chinese yuan is currently experiencing volatility and directionless trading. While the US dollar has been on a downward trend, the won has remained in a range, with an appreciation of 0.4% from the end of February. So, explores the factors that may be contributing to this lack of direction and offers insights into how the exchange rate may behave in the near future.
One major factor affecting the US dollar's value is the markets' speculation of a Federal Reserve rate cut in the second half of the year. This speculation is based on the stabilization of inflation and a gradual slowdown in the job market. The number of job openings at US firms fell sharply for the second consecutive month in February, while ADP private employment rose by only 14.5k in March, missing the consensus estimate of 210k. Additionally, the US March ISM Services Index slowed to 51.2P, below the consensus estimate of 54.4P. These factors have raised recession fears and created expectations of an end to the Fed's tightening cycle. Interest rate futures markets are currently pricing in a path for the Federal Open Market Committee (FOMC) to keep rates unchanged in May and June, followed by three rate cuts in the second half of the year.
As a result of these expectations, the US Dollar Index (DXY), which tracks the value of the US dollar against a basket of major developed market currencies, has fallen by -2.9% from 105P at the end of February to 102P on April 6. While bets on the US dollar's decline may be overdone, upcoming economic data may reflect a weakening of sentiment among private households, which could cause the US dollar to continue its downward trend.
Meanwhile, the Korean won's exchange rate with the US dollar has been experiencing excessive volatility, with an average daily fluctuation of 15.8 won in March. One characteristic of this volatility is that the correlation with the US dollar is weakening, while the correlation with the Chinese yuan is increasing. Market analysts predict that the yuan will gradually strengthen as the Chinese economy improves, but the recovery may be slower than expected, and the exchange rate will remain supportive until there is a clear rebound in real data. With the US-China conflict unresolved, the yuan's range-bound behavior may limit the downside of the USD/Yuan exchange rate.
Another factor contributing to the volatility of the won's exchange rate is the upcoming peak dividend payment season in April. Demand for foreign dividend repatriation is expected to increase, which could put upward pressure on the USD/KRW exchange rate. The Korean current account, which includes investment income such as dividends, has posted a large deficit in April every year since 2012.
According to Global Asset Research team at Hana Securities predicts, unlike in the past, the country's goods and services balances have been running in the red due to sluggish exports, and this month's deficit could add to the current account, increasing pressure on dollar outflows. Foreign buying of Korean stocks has also been weakening, putting pressure on supply and demand. All of these factors suggest that the dollar-won exchange rate is likely to remain volatile in the 1,300 won range in the short term.
