Week Ahead FX outlook:
This week, amid the US dollar’s 0.5% decline caused by softer US economic data, Asian currencies posted modest gains, with the Korean Won (KRW) being a clear outperformer. The key reason driving the strengthening of KRW is South Korea’s presidential election, where Jae Myung Lee was elected as the new president. President Lee is expected to help restore political stability and boost the domestic economic performance. On Thursday, a phone call happened between US President Trump and Chinese President Xi. And both agreed to more trade talks. The statement released by China’s official media showed that Taiwan was among the issues touched upon during the phone call, with Xi saying the US should handle it with caution, to avoid a few “Taiwan independence” separatists from dragging China and the US into a dangerous situation of confrontation. While the call provided some hope for lower tariffs/trade restrictions between US and China, optimism should still be limited.
With the July 8 deadline marking the end of US reciprocal tariff pause approaching, market attention is likely to remain focused on individual Asian countries' negotiations with the U.S. Having said it, we expect economic fundamentals will likely play a larger role in currency movement in the near term. Recent KRW’s strength seems to ignore the confirmation of Q1’s GDP growth contraction and worsening Korea May exports growth. With Trump’s 50% tariffs on steel and aluminium being effective on 4 June, new incremental stress would be brought on Asian exports, including South Korea’s steel exports. Next week, China will release its May inflation numbers. We expect moderate worsening from April numbers, which will support the case for continued monetary policy easing and reinforce the need for additional fiscal easing in China. This could exert mild downward pressure on the Chinese yuan (CNY). In G3 economies, market attention will turn to the upcoming U.S. nonfarm payrolls report, due later today, and inflation data scheduled for release in the week ahead.
Korean Won strengthened further following the presidential election
