Korea: Fed lift-off implications on BOK policy – Nomura

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Nov 12, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) - Young Sun Kwon, Research Analyst at Nomura, suggests that the Bank of Korea should cut rates later due to tighter financial conditions as the Fed begins its much awaited lift-off.

    Key Quotes

    “After the surprisingly strong US nonfarm payrolls print on Friday, our US Economics team now expects the Fed to raise interest rates in December.”

    “We see downside risks to our 2016 Korea GDP growth forecast of 2.5% due to tighter financial conditions, lower commodity prices and stronger effective exchange rates.”

    “We maintain our call for two more 25bp policy rate cuts to 1.00% by June 2016.”

    “Our US Economics team believes that the positive turn in the US data and Fed Chair Yellen’s comments significantly increase the likelihood of a Fed lift-off in December. Our US team believes the FOMC will continue to stress that the subsequent rate adjustment will be “gradual” and “data dependent” and expects three rate hikes between now and the end of 2016, with three more in 2017.”

    “Prior to this, we had pushed back our Bank of Korea policy rate cut due to a fiscally driven strong Q3 GDP print. However, a Fed lift-off should result in tighter financial conditions in Korea as the economy depends heavily on wholesale funding. Local currency corporate and government bonds outstanding stood at 130% of GDP in Q2 2015, the highest in Asia.”

    “A stronger KRW against its major trading partners (except USD) and lower commodity prices should have a negative impact on Korean exports, 58% of which go to emerging economies, from January to October 2015.”

    “All in all, we see increasing downside risks to our 2016 GDP growth forecast of 2.5% and maintain our call for two 25bp policy rate cuts to 1.00% by June 2016.”
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