Thread by @Trinhnomics

Korea's largest trade partner is China but don't let that fool u to think that its economic cycle depends on China's domestic demand. It's a supply chain story where Korea chips flow to China as intermediates that will then be exported to the US. Korean economy syncs w/ US demand

https://twitter.com/asiasquawkbox/status/1464036182824734723

Korea's 50bps hike reflects stronger growth in the peninsula thanks to exports & not much disrupted domestic mobility (its strategy to Covid also similar to the US where it never went for Zero Covid).

US retail sales & Korean exports in %YoY. They correlate. US demand matters.

The hike was widely anticipated so the big question is what gives in 2022? More to come? See here on rates where SK rates expectations go higher w/ US rates while China slowing demand = easing expectations. Rates in SK follow US more than CH as relationship is a supply chain 1.

In 2022, we expect external demand to slow & so Korean exports of chips will decelerate (prices have declined as of late & thus sagginess to Kospi comes from less liquidity + cyclical semiconductor).

Domestically, help still comes from fiscal & also not much restrictions but..

Monetary policy will be less supportive (another 50bps hike is expected by @natixis but will pause first before it's delivered to assess the front loaded ones).

Why hike w/ slowing growth? Well, inflation! A low base in H1 will push it higher as costs rise on fuels + agri. And?

And: HIGHER IMPORT COSTS from a weaker FX this year.

Look at Asian FX relative to the USD. We know that trade is invoiced in USD so what that means is that Asian countries will have higher import costs not just from HIGHER COSTS but also pass-through of DEPRECIATION.

To find out more, check out our Asian 2022 Outlook on key themes of 2022🙇🏻‍♀️🙇🏻‍♀️🙇🏻‍♀️.

Sincerely,

@Trinhnomics @natixis @NatixisResearch