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Forex Flash: South Korean inverted yield looks unsustainable - Nomura

Nomura economist Young Sun Kwon feels that South korea´s inverted yield looks unsustainable but he expects it to normalise and GDP to grow modestly on improved global demand and stimulus measures.

Young begins by noting that upcoming macro data and the Bank of Korea´s March policy decision will test the validity of the inverted yield curve, which has given a 2.75% policy rate, having reached a historical extreme on March 5th. The January-February MPC meeting minutes showed that a majority of the MPC voted to hold rates, with one member voting for a 25bp rate cut. Further, he adds that recent macro data has been mixed, with January industrial output falling, but year to date exports gaining slightly. He expects most MPC members to remain in wait and see mode at the 14th March meeting.

Further, Young expects exports to gain further, supported by solid demand from the US, China and Asia. He writes, “The government‟s fiscal front-loading, increase in social welfare spending and upcoming deregulation in the property market should support domestic demand. We maintain our call for no rate cuts through 2013.”

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