Thursday, January 24, 2013

1993-1995 analog? "Check". And now WHAT on the KRW?

On Jan 14 I posted on Twitter that KRW, MXN would be targets of the Japanese monetary sloppiness. It has started already.


I'll change this/update this post later with more info as right now it is 11h30pm and I'm still at the office.

** I do not believe there'll be "1997 Asian Crisis" as many things are different structurally, but it seems to me there's a rationale for a gradual policy induced, activity pushed, devaluation of the Korean Won.


Is the South Korean Won a short?
Versus who?

I think so. USD anyone? Or other security/currency?

In mid 1990s many east asian currencies (remember the Asian Tigers?) were somehow pegged to the USD.

Good paper from 1999 with lots of details, interesting read.

Joseph Whitt [macro econ from the Atlanta Fed] - The Role of External Shocks in the Asian Financial Crisis

At the time policy changes pushed the USD higher versus the JPY and, while these smaller asian nations, with business models based on increasing exports and investments, were roaring. Investment and capital flows were inwards and in large amounts, their currencies went up in value versus others and versus the USD, which was stronger versus a strong tech-competitor, the Japanese Yen.

So where was SK then?

Exports as a percentage of GDP back then was like that and is now like this:

So if you do a little math, simple, to say, "When, outside of GDP drop (2008?), was the necessary change in Exports so low to make the yearly surplus go to 0% of GDP?". Find below. Of course that Imports could also drop, but with such a strong currency imports are likely to actually increase while exports decrease. That's a crush on Trade balance.

So... chart below: never! was the necessary change in Exports relative to Imports, due to their massive share of GDP (very open economy, huh?), so low for trade capital to get to 0.

So let's look at what happened back then with Exports... and what precipitaded the slow down, then reduction in capital flows:

And then what happened to the trade surplus... Back then the Surplus was actually a deficit, but with a rising KRW it got worse and worse.

So far the Trade Balance has been healthy and just some slow down in that as domestic activity has slowed down too curbing imports:

And that's why economic activity has slowed and there's little growth:

And inflation, helped by a stronger currency, has been so low...

Basically I expect rate cuts from the Bank of Korea due to basic things:
- reduced yields in local currency that will perhaps stop capital inflow into korean securities / bonds: less carry
- stimulate domestic activity through lower yields for corporates / investments

The BOK should soon start being more aggressive on currency interventions like so many other central banks have been: Fed, SNB, BOJ, Brazilian CB (Bacen), others, others..

In this case... a massive trigger for the BOK to act faster or with more intensity, either cutting rates or changing FX Swap position regulation for local banks or whatever is that South Korea has a export-mix which is very similar to Japan, whose currency has depreciated remarkably in the past few months: tech products, robots, TVs, vehicles. While importing raw materials, crude oil, foodstuffs.

Terms of Trade:

So... basically this is an objective start. Their current account has been explosive because 1/ Trade Balance continues very strong due to reduction in Imports and 2/ safe-haven flows into a country where rule of law applies, where productivity growth is good, where inflation is controlled and the financial system seems alright (or not?).

I need to elaborate on risk-reward, carry, etc, but I haven't had much time as I am focused in energy commodities right now. But this came to mind.

A few more charts. I'll update this post sometime this week with Current Account #s and whatnots.

*Disclaimer: charts and data are presented as I receive/see them. Sources are usually not checked for validation and my own calculations are of 'back of the envelope'-type. I am aware that some math that I do myself might be wrong and/or misleading to some extent. In financial markets the rate of change of economic data is often more important than the actual level and the perception of 'what is priced in' is more important than 'what is actually going to happen'. This is actually the way people pick entry and exit points. So... yes, sometimes you might say 'This guy is an idiot, this is way wrong!' with a high conviction, being right. Not to worry. Markets are made of expectations and the clash of conviction between its participants. Portfolio managers know that being an idiot is sometimes profitable and being smart is often a bad choice. It is all reality, sometimes good, sometimes bad. By the way: corrections to my analysis and intelligent debate is welcome. theintriguedtrader AT gmail do com

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