Dot-plot to riseBy Peter Rosenstreich
A rate hike of 0.25% already is expected from today’s meeting of the US Federal Reserve Bank’s Open Market Committee, so the big question is: will there be 3 or 4 rate hikes in 2018? The answer will come with the so-called ‘dot-plot’ forecast that the Fed will also release later today. We suspect there will be another dot, i.e. 4 rate hikes will be in the works. But even in the event of this hawkish result, we do not foresee a radical market reaction. It will take more then another dot (which has mostly been priced in) to break USD out of the current range. (That said, a possible range-breaker would be if US 10-year T-bills were to hit 3%.)
All eyes today will be on the Fed’s Summary of Economic Projections (SEP). Data so far in 2018 indicate a cooling in the US economy. Fears of over-acceleration due to the Trump tax-cut seem to be overblown. Still, lingering strength in the labour markets suggests a higher trajectory in wage growth that could spill over into consumer-product inflation.
South Korea defies trade warBy Vincent-Frédéric Mivelaz
We expect the USD/KRW, currently trading at 1072 to the USD, to head higher to the 1075 range. South Korea relies on its exports to grow, and so could suffer if a global trade war were incited by the USA. Its key commercial partners China (35%), US (16%) and Japan (11%) would be in the middle of it, which would hit Korea’s manufacturing exports, particularly in steel and machinery parts (e.g. automotive, electronics and ship industries).
However, we see the impact as rather subdued, because of the Korea–US Free Trade Agreement of 2012, the USA’s largest free trade agreement since NAFTA (signed in 1994) and South Korea’s position as a main trading partner for the USA. Moreover, Bank of Korea Governor Lee Je-Yeol earlier this month confirmed that his country is not classified as a currency manipulator by the US. At a recent parliamentary hearing, Lee Ju-Yeol confirmed the accommodative stance of the BOK, confirming that he could raise interest rates at the next policy meeting of 12 April, if current growth is maintained.