KRW: Won Rebounds, USD/KRW Back Close to 1300

EXECUTIVE SUMMARY

• The RBA delivered the widely expected 50bp hike at the end of its July meeting, reiterating its forward guidance surrounding further policy normalisation.
• The Bank still feels that the resilient domestic economy will provide it with the base to tighten further, but there was a slightly more cautious feel to the post meeting statement
• We pencil in a 50bp hike for the August meeting, although we note that market pricing surrounding the terminal cash rate (~3.50%) continues to look aggressive.
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USD/JPY spent the post Asia close generally on the back foot, although we couldn't break back down through 135.50 and tracked out familiar ranges. The early tone today though has been downside, with the pair breaking down through 135.50.

• JPY saw strong outperformance against EU crosses overnight. The plunge in EU yields as recession fears mount a major a driver overnight.
• EUR/JPY dipped just below 139.00 (last 139.10), note the 50 day MA comes in at just above 139.02. We had a number of false breaks below this level in May.
• NOK/JPY fell just over 2% in the past 24 hours and is now back sub 13.50. The plunge in oil prices accentuated the risk off move in this pair.
• USD/JPY may have seen greater downside, if not for late US equity rebound and steady VIX levels closing levels relative to yesterday.
• USD/JPY still looks too high relative to US yields, but the short term focus will be on whether we can sustain this break of 135.50. On the topside, note yesterday's highs around 136.30/35.
• The local data calendar is quiet today.

A quick summary of sell-side BoK calls after yesterday’s CPI print:

• Goldman Sachs: While the acceleration in headline inflation might prompt some MPC members to lean towards a 50bp hike in July, we maintain our baseline forecast of a 25bp hike in the July 13 meeting. Recent communication from policymakers, including from an inter-ministerial meeting which Finance minister and BoK governor attended, suggests that they would prefer keeping optionality in the pace and extent of monetary tightening, given rising downside risks to global growth and potentially large negative side effects of rapid policy rate hikes on domestic demand and financial stability. We continue to expect the BoK to raise its policy rate to a peak of 2.75% at 25bp increments in the remaining four meetings in 2022.
• ING: Based on recently released data, we expect the BoK to deliver a 50bp hike in July, and then to revert to 25bp hikes in August and October. We still think that a total of 100bp of increases could stabilize inflation by the year-end. But, as tightening monetary conditions both home and abroad negatively impact next year’s growth, we expect the BoK will enter an easing cycle by the end of 2023.
• J.P.Morgan: Looking forward, we expect Y/Y inflation to remain above 6% through the end of ‘22 and rise temporarily above 7% in early Q4, based on the assumption that core prices’ sequential trend growth should remain elevated above 4% annualized pace in the coming months, and imported raw material prices (including crude oil prices) M/M gains should stabilize in the coming months. In the medium term, we expect both core and headline prices to stabilize by end-2023. In terms of policy implications, we already incorporated the upward trend of inflation in our Bank of Korea policy forecast, with a 50bp hike in July followed by a 25bp hike in consecutive meetings by January 2023 to 3.25%. We maintain our previous call for BoK policy response next week (50bp hike), looking for hints on forward guidance in post-MPC communications.