FX, bonds roiled by 'Warsh shock' and talk of a supplementary budget… “Bond yields rising”

Korea Economic Daily

Summary

Experts said they are leaning toward the view that the won’s weakness could continue this week as well.
They said the market consensus is that bond yields are likely to keep rising for the time being, driven by the “Warsh shock” and President Lee Jae-myung’s hint of a possible supplementary budget.
Lee Seung-hoon, an analyst at Meritz Securities, said he expects the won-dollar exchange rate to trade in a 1,420–1,470 won range this month.

In Seoul’s FX market last week, the won-dollar exchange rate opened at 1,446.10 won and closed at 1,443.50 won on the 31st of last month. The weekly trading range was limited to 2.60 won, but the daily rate swung sharply, riding a roller coaster. On the 28th of last month, after U.S. President Donald Trump made comments seen as tolerating a weaker dollar, the rate fell to as low as 1,422.50 won, only to rebound quickly into the 1,440-won range on the 30th after Trump named Kevin Warsh, a former Fed governor, as a successor to Jerome Powell, chair of the U.S. central bank (Fed).

Experts say the won’s weakening trend could persist this week as well. The market views the chair-designate Warsh as less dovish than candidates widely mentioned as leading contenders, including Rick Rieder, BlackRock’s global fixed-income chief investment officer (CIO). On the 30th of last month, U.S. stocks fell across the board, and international silver prices plunged more than 30% intraday.

Still, a reassessment of Warsh’s policy leanings remains a variable. That view is based on remarks he made in a media interview in July last year, criticizing that “the Fed is hesitating to cut rates,” as well as an op-ed he contributed to The Wall Street Journal in November last year, arguing that “if the Fed shrinks balance-sheet assets, it can secure room to keep the policy rate lower.” Lee Seung-hoon, an analyst at Meritz Securities, forecast that “the won-dollar exchange rate will fluctuate within a 1,420–1,470 won range this month.”

In Seoul’s bond market on the 30th of last month, the yield on the 3-year Korea Treasury Bond rose 0.032 percentage point from the previous day to 3.138%, while the 10-year yield climbed 0.050 percentage point to 3.607%. Market participants largely expect bond yields to keep rising for the time being. In addition to the “Warsh shock,” President Lee Jae-myung has hinted at the possibility of compiling a supplementary budget.

By Lee Kwang-sik bumeran@hankyung.com