Trade Idea: Switch to JPY to fund KRW long

Trade Detail: Sell JPYKRW. Spot at entry 11.51. Target 10 with stop at 12.1 for a risk reward of 2.7:1. We are allocating 33% of our portfolio into this trade. We close our short USDKRW NDF position with a loss of 1%, to start this as a new trade even though we are just changing the funding side to JPY from USD. We have a wider stop since we are treating this as a 3 month trade leading to the July Upper House election in Japan. Still like KRW We still think KRW will do well from 1) export recovery from a stronger US economy 2) foreign bond inflows and 3) positioning is light (for details see Trade Idea: Long KRW vs USD 28 Jan 2013). In addition, Bank of Korea is keeping interest rates steady and the BoK is nudging the government to pursue fiscal policy to support growth rather than through cutting interest rates. This will support KRW. North Korea tensions have increased but we think it is mostly talk and North Koreas actions are to solidify domestic power base instead of starting international conflicts. Correlation to JPY weakness hurting KRW The KRW has been hurt by JPY weakness. The market thinking is that this is a zero sum game and JPY weakness will hurt Korean exporters and the overall economy. Our view is that over time, Japans monetary stimulus increases Japans demand and helps Korea. However, in the short term, we will not fight the markets thinking and limit this risk by switching to JPY funding instead of USD. We think JPY will continue weakening especially heading into the Upper House election in July where Abe and LDP will do whatever it takes to win and control both houses. In addition, we would like to be positioned before April, when the new BoJ Governor Kuroda takes over and installs new easing measures. Is it better to wait for a correction? Short term risks exist on JPY with March repatriation and high expectations for the BoJ meeting on th April 4 . However, we would see correction or disappointment as an opportunity to add to the position. For the BoJ meeting, we think a disappointment on April 4th will see a reaction by BoJ to implement stronger, redeeming easing measures in the April 26 policy meeting where they set the Economic Outlook for March 2015 (if March 2015 CPI forecast is under the 2% target, they would need to implement measures to reach the target). Risk to the trade is China The number one risk to the trade is if USDCNY fixing starts moving higher, which can be interpreted that China is joining the global currency depreciation game. We think China will continue appreciating its currency at a slow pace to continue the structural shift of moving up the value chain in exports. However, if our view does not unfold, we would exit this trade and revisit our general view on Asian currency appreciation for this year.

THURSDAY 14 MARCH 2013

EDITOR Sean Yokota

Head of Asia Strategy
sean.yokota@seb.se

+65 6505 0583

You can also find our research materials at our website: www.mb.seb.se. This report is produced by Skandinaviska Enskilda Banken AB (publ) for institutional investors only. Information and opinions contained within this document are given in good faith and are based on sources believed to be reliable, we do not represent that they are accurate or complete. No liability is accepted for any director consequential loss resulting from reliance on this document. Changes may be made to opinions or information contained herein without notice.

Asia Strategy Focus

Open Trades Short JPYKRW

Date of Weight in Spot at Entry PF Entry 14-Mar-13 33% 11.532

Fwd at Entry

Target 10

Stop 12.1

Current Spot Price 11.52662

Price at Exit

Date of Exit

Profit* 0.05%

Weighted Profit** 0.02%

Closed Trades Long MYR vs USD 1M NDF 11-Jan-13 Long KRW vs USD 1M NDF 28-Jan-13 Year to Date Returns 2013

17% 33%

3.0165 3.021 1087.465 1089.00

2.94 1060

3.061 1098

3.06 28-Jan-13 -1.14% 1103.18 14-Mar-13 -0.99%

-0.19% -0.33% -0.50%

*Profit is calculated as spot at entry to current spot plus carry earned from date of entry. We are assuming that carry is earned evenly, every day for simplicity. ** Weighted Profit is the profit of the trade multiplied by the weight in the portfolio.

Asia Strategy Focus

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