Invest in the Korean W, Credit Agricole advisesInvestors should buy Korea’s won against the dollar using six-month nondeliverable forwards, Credit Agricole CIB said, predicting that the Asian currency will be supported by an improving economy and capital inflows.
The forwards market is pricing in depreciation, while a strengthening is expected, strategists Frances Cheung and Dariusz Kowalczyk wrote in a report released on Thursday.
They recommended a target of 1,050.1 won ($0.93) per dollar for the trade, which is 9 percent stronger than the six-month contract’s current level of 1,144.14. Investors should exit the bet in the event of a weakening to 1,187, the French bank advised.
“The currency, fundamentally, is sharply undervalued,” Cheung and Kowalczyk wrote. Korea’s “current-account surplus has been stable and solid and its direct investment deficit has narrowed,” they said, noting that the nation has the lowest exposure to the euro area among Asian economies and will benefit from strengthening demand in China.
Korea’s gross domestic product rose 0.9 percent in the first quarter from the previous three months, the fastest pace in a year, government data showed. Exports contracted for a second month in April and the trade surplus was $2.2 billion, according to official figures released this month.
Credit Agricole said it expects the trade balance to remain in surplus, adding that while North Korea is “a wild card,” risks are manageable.
South Korea’s government said this week it suspects the North of jamming global positioning systems of airliners operating out of Seoul, escalating tension on the peninsula.
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