Won’s Strength Puts Spotlight on Bank of Korea Policy Meeting

(Bloomberg) -- South Korea's won has the potential to test resistance at its 2018 high after the currency posted the strongest gain in Asia last quarter.

How soon it may get there depends in part on what the central bank says about the rally at its policy meeting in Seoul this week.

The won broke through the key psychological level of 1,100 per dollar in December, even after Bank of Korea Governor Lee Ju-Yeol said authorities were ready to act against sharp moves. Each incremental gain in the currency is chipping away at the competitiveness of Korean exporters, adding to the risk that policy makers will intervene.

Further recovery in global growth, the trade outlook and the extension of equity inflows all point to modest medium-term gains in the won, according to Mayank Mishra, global macro and FX strategist at Standard Chartered Plc in Singapore.

From a technical viewpoint, with resistance around the psychological level now breached, the door is open for a test of the currency's 2018 high at 1,054 if investors hold onto their risk appetite over coming weeks. Rising Treasury yields, though, may pose another hurdle.

As 10-year Treasury yields breached the key 1% threshold last week, the won and other emerging-market currencies were knocked back against the dollar. Still, there continues to be consensus on Wall Street that the world's reserve currency will weaken this year.

The won should retain a strengthening bias while it remains above its 50-day moving average, currently around 1,104.57. Bulls can also take some solace from the fact that warnings from Lee and other officials aren't always followed by the Bank of Korea aggressively entering the foreign exchange market.

Despite the won advancing 2.9% in the third quarter of 2020, the central bank reported no net transactions of foreign currencies during the period to curb the move, according to the latest data released in December.

Korean officials will also be wary of raising the ire of the U.S. with any large scale intervention after the Treasury Department kept the country on its monitoring list in December.

Below are the key Asian economic data and events due this week:

Monday, Jan. 11: Australia retail sales, China CPI and PPI, Malaysia industrial production
Tuesday, Jan. 12: Japan BoP current account, India industrial production and CPI
Wednesday, Jan. 13: South Korea unemployment rate
Thursday, Jan. 14: New Zealand building permits and house sales, Japan core machine orders and PPI
Friday, Jan. 15: Australia home loans, Bank of Korea 7-day repo rate, Philippine overseas remittances, Indonesia trade balance, India trade balance