Korea's Won Falls to 26-Month Low as PPI Data Disappoints, Dollar Extends Gains

The South Korean currency fell to its lowest since September last year on Wednesday as producer prices fell more than expected in October, increasing expectations of further rate cut by the Bank of Korea.

The Producer Price Index (PPI) fell 0.7% from a year earlier in October, its lowest since February, from 0.4% in September, data showed on Wednesday. Analysts were expecting a reading of -0.5%. Month-on-month, the index fell 0.6% compared to the 0.3% decline in the previous month. October's was the third straight negative number for the index.

USD/KRW rallied to 1108.10, its highest since September 2013, from the previous close of 1100.8. The pair has been on an upward trend since late June after hitting a 6-year low of 1008.0. The won has weakened more than 9% since then against the dollar.

The US PPI data released overnight, however, came in stronger than expected, helping the dollar extend gains. The USD index, the gauge which measures greenback's trade-weighted strength against a basket of six majors, has risen to 87.78 from the previous close of 87.57.

BoK Rates

The BoK had cut its benchmark interest twice during the period, once in August followed by October, taking it to 2% from 2.5%, where it had been held for more than five years.

In the 13 November policy statement, the central bank noted the slowdown in core inflation which was due to slowdown in the industrial product price increases. Naturally, continued downward momentum in PPI should further lower inflation rates of the country.

Next important data from Korea will be the November inflation numbers on 2 December and third quarter GDP data on 4 December. In addition, the 10 December unemployment rate will also help the BoK set rates on the following day, making it a extraordinarily crucial event.

USD/KRW Technical Analysis

The pair has broken through the 61.8% Fibonacci retracement of the one-year selloff through June this year. In fact, the break of the 50% line of 1085 in the first week of this month was crucial, which made further advances easier.

Further north, the pair will face resistance at 1127 and 1142 ahead of a retest of the 2013 peak of 1162.90.

On the downside, the 50% line has turned a major support line. If it is broken, the 1055-1045 band will emerge as the next important support zone ahead of a retest of the June low of 1008.

On the monthly chart, the downward channel since 2009 is still intact though there is some more room to hit the upper band of the channel in the current wave.

At the same time, the strength of 1050 support region for the medium term suggests another slip to the 1000-mark could not very easy.

Overall, the pair seems entering a broad sideways track of 1050-1200, with the likelihood of the downside band dipping by another 50 won.