Asian FX has been quite mixed. USDCNY has risen to 7.2450 but most of the rest of the Asia pack has followed the JPY stronger, led for once by the MYR and TWD. It looks like there are multiple opposing gravitational pulls on smaller Asian currencies at the moment. US equities reverted to selling yesterday. The S&P 500 fell 1.37% and the Nasdaq dropped 2.3%. Chinese stocks also fell yesterday, though not as much as those in the US.

South Korea: Consumer prices ticked up to 2.6% YoY in July (vs 2.4% in June, 2.5% market consensus). Price increases in food and energy were most notable but service prices also gained. Core inflation excluding food and energy stayed at 2.2% YoY for the third consecutive month. Compared with the past month, headline inflation rebounded 0.3% MoM NSA (vs -0.2% in June, 0.3% market consensus). As expected, bad weather conditions pushed up fresh food prices and the reduction in fuel tax cuts sent gasoline prices higher in July. Service prices rose ahead of the summer holiday season, mostly in travel and leisure-related prices.

Although consumer inflation picked up in July, it is set to cool sharply to around 2% from August onwards, mainly due to base effects. Therefore, we expect the Bank of Korea’s policy focus will gradually shift from price stability to financial stability. At the last meeting, Governor Rhee Chang-yong expressed concern that any signals of policy easing could stimulate housing prices and lead to rising household debt. 

We maintain our long-standing call for a BoK cut in October but see risks building around our call. The recent rise in house prices and household debt could push back the first cut. To stabilize the housing market, policy coordination is a must, thus we also need to monitor how the government reacts to the recent rapid rise in house prices. We also see that growth conditions have softened recently. Restructuring in the construction sector is still ongoing, while the household delinquency ratio is rising rapidly. As for the payment problems of e-commerce companies, this is unlikely to escalate into a major issue, but the fact that it is happening is a sign of weak domestic demand. Thus, sluggish domestic growth could trigger BoK rate action sooner rather than later.