USD/KRW: Bright prospects for the Korean won in 2021 – MUFG

During 2020 the Korean won strengthened against the US dollar from 1155.4 to 1084.4. 

According to economists at MUFG Bank, prospects look bright for South Korea in 2021 and the KRW is set to be supported by stronger external demand.

Key quotes

“Factors that drove the won higher in 2020 are likely to continue to lend support in 2021 – improving external demand amid the tech boom, surge in inflows into equities particularly 5G-related firms, and favourable vaccine developments with inoculation to begin in January. This is in addition to extended dollar weakness amid quantitative easing (QE) by the Fed.” 

“The factor that could temper won strength is the public pension fund’s planned annual increase in asset allocation into overseas equities from 22% to 35% by 2025.”

“South Korea’s economy is expected to recover back to pre-COVID-19 levels as soon as 1H21 in nominal GDP terms. According to the government, real GDP growth is expected to rebound by 3.2% in 2021 from -1.1% in 2020, buoyed by the external sector and massive fiscal spending.” 

“With macroeconomic prospects looking brighter for South Korea, it reduces the need for the BOK to ease monetary policy. We expect no change to the benchmark seven-day repo rate at the record low of 0.50% and low probability of quantitative easing in 2021.”