FxWirePro: long USD/KRW as a hedge against adverse August seasonal patterns through 1 month Non-Deliverable Forward
Source: FxWire Pro - Insights & Views / 29 Jul 2016 06:31:16 Eastern Standard Time
Korean currency has won the trading against US dollar consecutively and continued its multi-month gains, KRW gained almost more than 10% to evidence 9 months lows of USDKRW.
Since the end of February, the KRW rallied the most in Asia and significantly outperformed the rest of EM with the exception of high-beta commodity producers (COP, RUB, and BRL).
Well, at the moment hedging USDKRW using options is not advisable, alternatively, initiate USDKRW longs in 1m NDFs at current 1120 levels with a target at 1175 (>+4.5%) and stop below the strong support at 1110 (-0.89%). The trade is very tactical and is meant as a hedge against existing short dollar exposure of EM carry trades. The expected time horizon of the position is one month and negative carry is minimal (9bp/month).
Rationale: Low carry and attractive entry point, long USDKRW as a hedge against adverse August seasonal patterns. August has been a very poor month for EM currencies - falling 1.4% over the past 10 years – with Asia FX depreciating in seven of the last 10 years. This is either due to random events or investors reducing risk during the illiquid part of summer trading (link).
Risks profile: Technicals, risk-on, and continuation of foreign inflows
Risk-on feel in emerging markets extending further on a dovish Fed or recovery in oil prices alongside foreign inflows into equities and bonds being sustained. From a technical perspective, a break below 1120 & 1110 (the neckline of a distinct head and shoulders pattern) would be a bearish signal for USDKRW, opening the door for further KRW strength.© FxWire Pro 2018. All rights reserved. The FxWire Pro content received through this service is the intellectual property of FxWire Pro or its third party suppliers. Republication or redistribution of content provided by FxWire Pro is expressly prohibited without the prior written consent of FxWire Pro, except for personal and non-commercial use. Neither FxWire Pro nor its third party suppliers shall be liable for any errors, omissions or delays in content, or for any actions taken in reliance thereon.