Hope everyone is well! Haven’t posted on the forums in a while as work and life has been very busy. I’m trying to take longer timeframes for my trades and to look for slower moving theses. Thought maybe we could start a thread on this trade idea.
DISCLAIMER: There are a lot of new faces in Valhalla which is awesome to see! I’m not the most experienced trader and still have much to learn but I like to post on the forums and at least start threads that interest me. My status in Valhalla is more due to my love for the community rather than my trading abilities.
As you can tell from the title I’m bearish on the Korean economy in the short-term:
A. MACRO ENVIRONMENT:
Trading Partners Economic Slowdowns: China and the US are the two largest trading partners for Korea with the Korean economy’s growth mainly driven by exports. Sluggishness from these two economies has a disproportionate effect on the Korean economy.
Korean Won Weakening: I’m not really fluent in FX trades but the Korean Won has been under significant pressure against the USD and although this would mean their exports become cheaper, the input costs have skyrocketed (such as fuel and raw materials all usually denominated in USD). This has caused what many suspect to be a cash crunch. Back in the late 90’s, the sudden devaluation of the Korean Won caused a financial crisis South Korea and the International Monetary Fund - Wikipedia Although the Korean economy is much more insulated from foreign currency fluctuations, there are now rumours that the Korean financial system is experiencing a cash-crunch with respect to the USD: Bank of Korea denies report of imminent FX swap with U.S. Fed | Financial Post
Continuing US Fed Interest Rate Hikes: much like the JPY, if the KRW continues to show weakness with each rate hike for the remainder of 2022, coupled with the continued weakness in demand for exports from China and the US, Korea’s economy looks to have a grim Q4 outlook.
B. THE TRADE: $EWY OR $KORU
The simplest trade would be to trade the KRW in relation to USD. There doesn’t seem to be an ETF like $YCS that tracks the KRW. Recently, the USD has continued it’s upward trend after a short retracement:
However there are two ETFs that track Korean stocks $EWY and $KORU (3x leveraged) and have options. Both have been in a freefall for much of 2022 but I can see more weakness if the macro forces continue.
The premiums on $KORU aren’t worth it IMO as there is little to no volume on the chain
The spread on $EWY is $0.20 on average down the chain so timing entry and exits will take some patience. This also provides a nice opportunity for value hunting.
Both of these tickers track $SPY, to a certain point, which means there is a disconnect from what the actual holdings in these ETFs and what they are doing on the Korean exchange. These tickers basically hold the 30 largest names on the KOSPI exchange and these are heavily weighted to industrials like POSCO (steel) or large conglomerates instead of tech companies like Naver and Kakao which have a more domestic market.
For a slow moving trade with heavy macro forces involved, ATM strikes for 30dte puts on $EWY seem to fit my trading right now.
My apologies as I have to make a revision to my first post. The etf $EWY is heavily weighted in electronics and tech companies like Naver and Kakao make up 2.89% and 2.01% respectively. At the time of writing I was doing this from memory and didn’t double-check my facts - won’t happen again.
Samsung Electronics is the 800lb gorilla though making up more than 20% and most of the other holdings averaging around 2%.
The Korean markets, KOSPI and KOSDAQ, were down significantly more than their Asian counterparts overnight. Coupled with Europe and UK markets in the red, it made for a significant gap down on SPY. $EWY also followed with a gap down.
ATM strikes during the last 2 days, while difficult to get fills, were sold easily at today’s open for around 2x (thank you Conq and gods for these reminders to sell puts at open).
This trade was mainly for me to get used to monitoring the market again and practicing trading at a slower pace. With today’s gap down, probably not the best time to enter for puts. I still believe in the overall macro backdrop for there to be more downside for Korean equities. For now it’s following SPY and inversing the strength of the USD so those would be good indicators to follow.
Looks like $EWY is going to gap down at open unless $SPY leads a nice charge to the upside. Korean markets were heavy hit overnight along with Japan. Right now in Asia, the export-dependent countries that require heavy inputs from foreign energy and raw materials are getting battered.
According to some, we may see a turnaround in Hong Kong markets though as manufacturing doesn’t make up a large part of the economy. Also, the HKD is pegged to the USD.
Here’s an oddity. Yesterday the KOSPI and KOSDAQ were relatively flat in trading but this morning premarket unusually large volume came in on $EWY - much more than regular trading hours.
Looks like 285,196 shares were sold at $49.05 for a $14M trade. Caused a 0.95% drop in share price. Anyone’s thoughts on this would be greatly appreciated.
This shit has been printing. Wish I could suggest a good entry point but would like to see a “bear rally” in $SPY first. Seems like hedgies have been reading my forum posts.
The Korean Government is introducing some unique policies on the fiscal side to try and repatriate foreign assets in order to defend the Korean Won.
More importantly, they are loosening their monetary policy to combat rising yields on Korean government bonds.
The last part of this article peaked my interest although I wouldn’t put too much weight on it:
In a telephone conversation with U.S. Treasury Secretary Janet Yellen, Friday, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho agreed to work together and implement liquidity facilities when necessary.
Looking at the chart for $EWY on monthly candles, there was a huge drop during the US Housing Crisis that persisted for a year in 2009. Also, more recently, there was a drop below $48 in March, 2020 like everything else.
If the USD does start to trickle down, and there isn’t another black swan event in the next couple of months, we may have reached a bottom here and should see movement upwards by the end of 2022. Inversely, if there is an external shock to global markets and Korea must implement both fiscal and monetary policies to defend currency devaluation, we should see well below the $48 support level.
