USD/KRW rises as South Korea economy enters first recession in decades

USD/KRW rises as South Korea economy enters first recession in decades
Written by:
Crispus Nyaga
July 23, 2020
  • The USD/KRW pair rose as investors reacted to the first South Korean recession in decades.
  • A plunge in exports led the economy to contract by 3.3% in the second quarter.
  • Analysts expect the economy to contract by between 0.4% and 2.1% this year.

The USD/KRW pair ticked up slightly as traders reacted to the disappointing economic data from South Korea. The lightly-traded pair is trading at 1197.88, which is a few pips above this week’s low of 1192.95.

USD/KRW
USD/KRW reacts to South Korea recession

South Korea sinks into recession

South Korea is one of the biggest economies in the world. It has a GDP of more than $1.7 trillion, making it the 11th biggest economy in the world. It is the fourth-largest in Asia after China, Japan, and India. The country is well-known for some of its biggest companies like Samsung, LG, Hyundai, and Kia.

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Also, the country has received praise for the way it handled the coronavirus pandemic. According to Worldometer, the country of more than 51 million people has had only 13,900 cases and about 297 deaths. It achieved this by implementing mass testing and contact tracing when the pandemic started.

However, according to the Finance ministry, the economy sunk into a recession in the second quarter. The data showed that the economy shank by 3.3% in the June quarter from three months earlier. That was the worst contraction since 1998. Analysts were expecting the economy to shrink by 2.3%.

The contraction was mostly because of a sharp decline in exports which account for 40% of the total GDP. Exports dropped by 16.6% in the quarter due to a sharp fall in motor vehicles, coal, and petroleum products. Imports increased by 7.4% mostly because of a sharp increase of crude oil.

Facilities and construction investments declined by 2.9% and 1.3%, respectively. These declines were partially offset by a 1% and 1.4% increase in government and private consumption, respectively. In a statement to CNBC, Alex Holmes of Capital Economics said:

“While consumer spending should gradually recover, the threat from the virus is unlikely to fade entirely and some social distancing will probably have to remain in place.”

Reasons to be optimistic

Still, there are reasons to be optimistic. In a statement, the finance minister said that the government had started seeing some improvement in external demand and internal consumption. He expects the economy to have a China-style rebound in the third quarter as foreign demand increased. For example, while industrial production fell by 9.6% in May, retail sales jumped by 4.6%.  

The South Korean government has put in place measures to help with this recovery. It has rolled out a stimulus package worth more than $231 billion (~20% of GDP). Also, the recent growth in China and other European economies is likely to bring more demand.

Similarly, the recent updates in developing the coronavirus vaccine will also help provide a boost to the economy. Still, analysts polled by Reuters expect the economy to contract by 0.4% while those at IMF see it falling by 2.1%. The Bank of Korea expects a decline of 0.2%, which would be the sharpest contraction since 1998.

USD/KRW technical forecast

USD/KRW
USD/KRW technical analysis

The USD/KRW pair rose slightly to an intraday high of 1200. On the daily chart, the price is slightly below the 50-day and 100-day exponential moving averages. It is also below the 61.8% Fibonacci retracement level. Also, it is slightly below the descending trend line shown in purple. Therefore, the pair is likely to continue falling mostly due to the weaker US dollar.