The South Korean won climbed to a seven-week high against the dollar on Wednesday (a USD/KRW low) of 1123.3 after third-quarter GDP data showed South Korea’s economy growing at its fastest pace in seven years. Third-quarter growth of 1.4% was well above the median estimate of 1.0% and an improvement on second-quarter expansion of 0.6%. Wednesday’s number took annualized growth to 3.6%, from 2.7% three months earlier.
Confirmation of robust growth in South Korea supports the idea that the country’s central bank, the Bank of Korea, will hike interest rates in the coming months. Interest rates averaged 3.3% in South Korea between 1999 and 2007 but have been held at a record low of 1.25% since June 2016.
A BoK hike has been on the table for several months – the bank’s governor, Lee Ju-yeo, said in June that future monetary policy would be tighter – but has so far been held off in light of the persistent threat of a military conflict with North Korea.
Tensions in the Korean peninsula have eased somewhat in recent weeks, facilitating the won’s 2% rise against the dollar this month, but remain ever-present. Speaking to CNN on Thursday morning (Wednesday in the US), North Korean Foreign Minister Ri Yong-ho said that Pyongyang’s threats to attack its enemies with hydrogen bombs should be taken “literally.” Kim Jong-un “has always brought his words into action,” the Minister added.
South Korea’s economy, like those of its neighbours, is benefitting from a surge in demand for Asian-manufactured goods. In September, data showed South Korean exports climbing to a record $55.1 billion and growing at an incredible annualized rate of 35%.
Elsewhere in Asia, for a third consecutive day, the Japanese yen refused to weaken to levels above 114 per dollar. A rally in USD/JPY to 114.24 in Wednesday’s European session was quickly reversed, with the pair ending the day at 113.73, down 0.15%.
The Chinese yuan was virtually unchanged against the dollar at 6.6349.
In North America, the big event on Wednesday was the meeting of the Bank of Canada.
As widely expected, the bank maintained its overnight interest rate at 1.0% but the “loonie” sank following the BoC’s statement, in which it said it would “be cautious in making future adjustments to the policy rate.”
A USD/CAD exchange rate of 1.2796 at the end of the New York session marked the Canadian dollar’s weakest level against the US dollar in fifteen weeks. The rate was nearly 3% higher than it had been one week earlier.
The US Dollar Index (DXY) fell 0.31 points to 93.63.
Like the Korean won, both sterling and the euro benefitted from better-than-expected economic data. Sterling climbed by nearly one percent against the greenback to 1.3255 on third-quarter GDP growth of 0.4% (0.3% expected) and the euro rose by half as much to 1.1812 after the IFO Institute released its Business Climate Index for Germany, which rose to a record high of 116.7.
It was also reported on Wednesday that the European Union, like the UK, had begun to make preparations for a “no deal” Brexit. This seemingly favoured the UK because EUR/GBP gave back all of Tuesday’s gains, falling by 0.5% to 0.8907.
The major European exchange rates have spent the last fortnight doing relatively little, but this is set to change on Thursday following the highly anticipated meeting of the European Central Bank. At the meeting, scheduled for 2:30pm local time (Frankfurt, GMT+2), no changes are expected to the bank’s interest rate, but investors will learn whether the bank plans to wind down its massive quantitative easing program. A tapering of the program has never before been discussed and the perceived hawkishness or dovishness of today’s statements by ECB President Draghi will likely set the tone for euro FX rates for the coming weeks.