The South Korean won has depreciated along with widening trade deficit. The strong correlation between the trade balance and the KRW implies that the won will likely appreciate when the trade deficit narrows, economists at Standard Chartered report.

Widening trade deficit weighs on the KRW

“Counter-intuitively, we have found that the trade balance has a much higher correlation with the KRW than the C/A balance. This strong correlation may partly explain recent KRW weakness and implies that the KRW is likely to appreciate when the trade deficit narrows.”

“We do not expect the trade account to turn supportive of the KRW in the near-term. Slowing global growth and external demand will likely keep the trade account under pressure, outweighing any benefits from a pullback in commodity prices.”

“We highlight a notable improvement in Korea’s capital account. Korean retail purchases of foreign equities have slowed and foreign flows to Korean equities have recovered – this is improving net equity flows following a sharp deterioration in the past two years.” 

“We believe the improving capital account may allow the KRW to start outperforming peers, even as broad USD strength and weak risk sentiment likely keep USD/KRW supported in the short-term.”

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