KRW Rates - There is strong upward bias and momentum in IRS and KTB yields, underpinned by BOK's hawkish stance. Announcement yesterday that pre-entry Covid test requirements for arrivals will be scrapped from 3 September pushed 1Y and 2Y IRS rates higher by 5 and 10bps respectively. 1Y and 2Y IRS rates are now higher than the mid-June highs and 1Y-2Y spread has re-steepened, as markets price for a more extended BOK hike cycle. There were comments yesterday by MOEF official that KTBs are likely to be added to FSTE Russell watchlist around end-September for inclusion to WGBI. If KTBs are eventually included, the resulting foreign inflows for longer-duration KTBs should flatten the curve and the associated USD supply from unhedged inflows would help balance structural USD demand from NPS's overseas investments.
INR Rates - OIS and Gsec yields should open lower after yesterday's holiday. Brent oil prices have slumped around 5% since Tuesday. 2Q GDP recorded 13.5% YoY yesterday, coming in below RBI's forecast of 16.2% YoY. As a result, there is scope for a near-term pullback in RBI hike pricing, which in itself could provide a fade opportunities. We think OIS in 6.0-6.2% range are fairly valued and there would be strong market interest to re-engage in payers at those levels. We think the risks of a RBI dovish pivot is low for now and therefore, the risks of OIS rates falling below 6.0% are capped.
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