MUFG’s Michael Wan argues that strong AI-related demand and semiconductor exports are offsetting Strait of Hormuz spillovers for some Asian markets, especially South Korea. He highlights hawkish Bank of Korea signals, robust exports and inflation, and expects South Korean rates to stay sticky. MUFG sees USD/KRW moving toward 1400 over the next 12 months.

AI tailwinds and hawkish BOK support

"While Asia’s markets continue to gyrate around the rollercoaster of US-Iran negotiations, what's important to note is that the positive impact of AI has offset the negative spillovers from the Strait of Hormuz for some Asian markets – in particular South Korea and Taiwan, and to a smaller extent Singapore and Malaysia."

"What’s notable for South Korea were hawkish comments by BOK Governor Shin Hyun-song, which essentially seemed like he was prepping markets for a July rate hike."

"In particular, he said that strong semiconductor exports have boosted growth rates and eliminated the dilemma for BOK around monetary policy, with many indicators including household debt and exchange rates pointing in the same direction."

"With the inflation numbers coming in stronger than expected at 3%yoy and exports in May on a working day adjusted basis coming in at a phenomenal 60%yoy, it does seem like it’s still an environment for South Korea rates to remain sticky moving forward."

"On our end, we think that will change and KRW is one of our top picks from an FX perspective moving forward, given cheap valuations, a more hawkish BOK, the gravity defying exports, a likely further improvement in the current account surplus, coupled with improvement in earnings expectations likely to offset resident outflows over time."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)