Bloomberg News

Top Won Forecaster Sees 5.4% Loss as Europe Damps Exports

July 06, 2012

South Korea’s won will post its worst quarter in a year as Europe’s financial crisis saps demand for exports, according to Credit Suisse Group AG, the top forecaster.

The currency will fall 5.4 percent to 1,200 per dollar in three months, the weakest level since October, Ray Farris, the Singapore-based head of Asia Pacific fixed-income strategy, said in a July 4 interview. The second-largest Swiss bank had the closest estimates in the last six quarters as measured by Bloomberg Rankings. The projection is more bearish than the 1,170 median estimate in a Bloomberg survey of 27 analysts.

Slowing growth in the euro area has prompted the South Korean government to cut forecasts for gross domestic product in 2012 and those for exports, which contribute about 50 percent to the $1 trillion economy. A 3.2 percent rally in the won over the past month will fade as risk aversion once again becomes the dominant theme for Asian markets, according to Sydney-based Westpac Banking Corp. (WBC), the second-best forecaster.

“Most indicators point to weaker Asian export growth, and with domestic demand extremely weak in South Korea, slower exports will have a disproportionately negative impact on the economy,” Farris said. “We still have concerns about the euro area, predominantly from a growth perspective.”

Europe Measures Limited

The won has appreciated 0.6 percent to 1,138.59 per dollar since June 29, when European leaders reached an agreement on measures to resolve its two-year-old debt crisis, which has shaved $3.9 trillion from global stock markets since touching the year’s high in March.

Officials overseeing the 17 nations sharing the single European currency agreed to spend 120 billion euros ($150 billion) to stimulate economic growth and dropped conditions on emergency loans to Spanish banks at the conclusion of a June 28- 29 summit in Brussels.

The measures will do little to improve prospects for global growth, Farris said. Westpac Banking predicts the currency will depreciate 2.4 percent to 1,166 per dollar by year-end, compared with the median forecast in a Bloomberg survey of 1,146.

South Korea’s government cut its 2012 estimate for export growth to 3.5 percent this month from a January projection of 6.7 percent, citing a slowdown in major economies. It expects the value of overseas shipments to reach $574.5 billion, compared with a previous prediction of $595 billion. The finance ministry lowered its economic expansion forecast to 3.3 percent in June from 3.7 percent previously.

Exports have dropped every month bar two this year, and rebounded 1.3 percent in June after contracting 0.6 percent in May, official data show.

HSBC Won Bullish

HSBC Holdings Plc is more upbeat on the won, saying the trade and current-account balances are supportive. The won has strengthened 1.2 percent this year, the fourth-best performance among Asia’s 11 most-traded currencies.

The won will appreciate 1.7 percent to 1,120 by Dec. 31, Perry Kojodjojo, a Hong Kong-based strategist at Europe’s largest bank and the third-most accurate forecaster for the currency, said in a July 3 phone interview.

The current-account surplus, the broadest measure of trade, increased to a six-month high of $3.61 billion in May, while the trade surplus reached $4.96 billion in June, the most since October 2010.

“Fundamentally, South Korea is still one of the stronger Asian countries,” Kojodjojo said. “Our economists expect Korea to raise interest rates early next year, one of the few Asian central banks to do so.”

The Bank of Korea held the seven-day repurchase rate at 3.25 percent for a 12th month at the last meeting on June 8.

Default Swaps

South Korea’s government bonds are rallying and the cost to protect the nation’s debt from default is falling.

The yield on 3.25 percent notes maturing in June 2015 dropped 33 basis points, or 0.33 percentage point, to 3.29 percent from the year’s high of 3.64 percent touched on March 23, according to data compiled by Bloomberg.

Five-year credit-default swaps fell seven basis points this week to 116 basis points, according to data provider CMA, which compiles prices quoted by dealers in the privately negotiated market. The contracts pay the buyer face value in exchange for underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

One-month implied volatility in the won, a measure of exchange-rate swings used to price options, has dropped 638 basis points to 7.17 percent in Seoul from a 2012 high of 13.55 percent, data compiled by Bloomberg show.

Year-End Rebound

Huw McKay, a senior international economist for Westpac Banking, said the won may weaken to near 1,200 in the next few months before rebounding toward year-end.

Forecasters were ranked according to the accuracy of their estimates in each of six quarters beginning with the three months ended March 31, 2011. To test long-term accuracy, Bloomberg added one annual forecast made on June 30, 2011 for June 30, 2012. The average margin for error was 3.03 percent for Credit Suisse’s won forecasts, 4.57 percent for Westpac Banking, and 4.65 percent for HSBC Holdings.

The International Monetary Fund estimated in April euro- area economies will contract 0.3 percent this year, while China will expand 8.2 percent. Europe’s GDP increased 1.5 percent in 2011, while China’s grew 9.2 percent.

“We’re very negative on all risk assets for the next few months,” McKay said in a July 4 interview.

Manufacturing in China, South Korea’s biggest export market, fell to a seven-month low in June. A purchasing managers’ index dropped to 48.2 from 48.4 in May, HSBC Holdings and Markit Economics reported on July 2.

“We don’t have any indications that weakness in the global economy is bottoming, but we tend to think we’ll see a bottom late in the third quarter or early in the fourth,” Farris at Credit Suisse said.

To contact the reporter on this story: Jiyeun Lee in Seoul at jlee1029@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net


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