There's more evidence that Korea economy is rebounding from 2Q slowdown

Expectations on BOK rate cuts have subsided.

In Korea, signs have become clearer that the economy is recovering from the 2Q slowdown triggered by the ferry disaster.

According to a research note from DBS, market expectations about BOK rate cuts have subsided.

Further, the gap between 1-year IRS rate and 3-month CD rate has evaporated, compared to the peak of -20bps in early-August.

Here’s more from DBS:

By contrast, the Japanese economy has not recovered from the 2Q slump caused by the sales tax hike, and has remained stagnant at the start of this quarter.

Expectations about BOJ easing are building up again. The non-commercial short positions in the JPY futures market have increased since the beginning of August.

A fast appreciation of the KRW against the trade partner currencies could drag the pace of Korea's export recovery, counteracting the effects of the government's pro-growth policies.

Officials from the finance ministry issued warnings against the recent FX movements last week. Verbal interventions from the BOK are expected to follow this week.

The Bank of Korea is expected to hold rates at 2.25% this week after just delivering the 25bps rate-cut last month.

Consumer confidence has improved over the past one month and manufacturing indicators have picked up, which should alleviate pressure for the BOK to cut rates further.

A renewed concern to policymakers would be the recent appreciation of the KRW effective exchange rates, as a result of the sharp fall in non-USD major currencies including the EUR and the JPY.

The KRW/JPY cross rate, in particular, touched a 6-year high last week. Given the divergence in the two countries’ economic trends and monetary policies, the upward pressures on the KRW/JPY would continue for some time.