In light of the Bank of Korea’s surprise policy rate cut in June, and the more recent rise in global risk premia folllowing the Brexit vote, it appears timely to expand on one of our long-running themes – that Korea is on a medium-term path to a zero interest rate regime. This reflects a number of external and domestic economic trends, which are reducing economic growth potential and maintaining a medium-term disinflationary path, which has the potential to become a deflationary one. We retain our bullish view on the Korea’s interest rate market, and also see the opportunity for forward starting curve steepeners to provide a cost effective way to add convexity into a portfolio. The post-Brexit slide in risk appetite has also accelerated what we expect to be an emerging trend – KRW weakness.

KRW IRS curve – 2s5s spot and 1yr forward.

Source: Bloomberg

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