South Korea on Edge

I was going to release this post later in the week, but seeing as the Kospi fell on Monday while the rest of the world's stock markets are rallying...

The bearish case for South Korea (stock market and currency): it is reliant on exports to China and the Chinese economy is in a cyclical slowdown, not a trade related blip. The prime macro asset here is the U.S. dollar. A China/global slowdown includes a stable/rising U.S. dollar. Given the position on the charts, one could take the other side of the argument. I believe the downside for $EWY exceeds the upside in a bullish scenario, there are likely better assets for those bearish on the dollar and bullish on emerging markets/China, but South Korea is still a great indicator.

Roughly half of South Korea's economy is exports and of that, more than one-quarter go to China.
Given the trading relationship, the won has been highly sensitive to the Chinese economy, but has become even more sensitive as speculators look for currencies that will suffer from a Chinese currency devaluation.
Reuters: South Korea's won is Asia's whipping boy in U.S.-China trade war
As trade tensions flared up between the world’s two largest economies last month and the Chinese yuan threatened to fall past the key 7-per-dollar level, the won slid to near 1,200 per dollar, its lowest since January 2017.

“The won is like a proxy currency to not only global growth sentiment but one that’s also related to U.S.-China trade talks,” said Park Sang-hyun, chief economist at Hi Investment & Securities in Seoul.

“It won’t be easy to keep the dollar/won level of 1,250 should the U.S.-China spat intensify, with possibly additional tariffs, for example.”
The won corrected along with the yuan and U.S. stocks in June, but all three remain in bull markets.
There's no end to the bull-bear debate over the U.S. dollar. One bearish case for the greenback is the Fed unleashes global quantitative easing and rescues the ECB, BOJ and PBoC. It goes from being "the cleanest dirty shirt in the laundry" to the dirtiest. Another dollar bearish scenario is the 10-year depression ends and inflationary growth returns. This could include stagflation in the developed economies, but primary industries (mining, agriculture, energy) are much larger portions of emerging market economies. They should see positive growth. Finally, the dollar has followed a roughly 18-year cycle going back to the 1980s, with roughly equal parts bull, bear and consolidation. The current bull market began in 2014 and would be likely to terminate over the next 12 to 18 months. It could dip and retrace back to current levels as it did in the early 2000s, but would not make a meaningful new high.

The charts also raise the possibility of an explosive (catastrophic for the global economy) dollar rally. If the Fed cuts rates, but the global central banks have to initiate extraordinary monetary policy because they have less room top cut (ECB,BOJ) or because their economies will suffer far greater losses in a recession (PBoC), the dollar should rally as it did in the early 2000s recession and during the 2008 financial crisis (yen being a potential outlier). Multi-year and multi-decade basing patterns are within striking distance even after the recent pullback in the dollar. The flipside of a dollar breakout would be inflationary pressure overseas as currencies devalue against the U.S. dollar. The extreme case is an echo of the 1930s when global currencies devalued versus gold. The country most similar to 1930s USA is China, but with more debt, less productive investment of that debt and worse demographics.

Along with the macro and currency case for South Korea, the South Korea ETF is at an important resistant level.
The China ETF is at a similar point.
There are only a handful of South Korea ADRs and even fewer with ample trading volume.

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