Macro conditions continue to improve in Korea

Exports grew faster than expected by 11.8% in January.

DBS Group Research noted:

The macro conditions have continued to improve in Korea, albeit modestly.

Industrial production rose 1.0% MoM sa in Dec12. Exports grew faster than expected by 11.8% YoY in Jan13. Although January PMI dropped slightly by 0.2ppt to 49.9, the subcomponent of new export orders improved from the previous month.

All these data support our view that the weakness in December exports was temporary and distorted by seasonal factors.

Moreover, as capacity utilization in the manufacturing sector continued to rise, investment spending has started to recover. Equipment investment index surged 9.9% MoM sa in Dec12, the first month of significant rebound after falling a cumulative 20% during Feb-Nov12.

The increasing signs of growth recovery should reduce pressure on the Bank of Korea to further cut rates. The key factor impacting the BOK's rate decisions is inflation/growth, rather than the FX movements.

Despite the appreciation of KRW against both USD and JPY in January, the BOK refrained from cutting rates. The USD/KRW is now returning to1090, far above 1060 one month ago; and the JPY/KRW has stabilized around 11.9.

Even if the won resumes appreciation and capital inflows resurge, we still don't expect the BOK to respond with rate cuts. Instead, we think the authorities will strengthen macroprudential measures to contain speculative inflows and moderate the won's appreciation.

Regarding the specific measures, a tightening of the existing regulations on banks' FX forward trading and FX borrowings will be more likely than punitive measures such as the so-called "Tobin Tax".