The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.By Ian Solot NEW YORK ( BBH FX Strategy) -- The Korean won has not participated in the year-to-date rally as vigorously as other emerging-market currencies and has underperformed other high-beta emerging-market plays. That said, we expect the dollar-won currency pair to continue moving lower if risk appetite keeps firm, although we also see several headwinds that could temper the Korean currency's relative performance. KRW has underperformed the rupee and ringgit by a wide margin so far this year and has also done worse than the Philippine peso and Singapore dollar. At the same time, year-to-date equity inflows totaled $7.8 billion, almost fully reversing the $8.6 billion outflow in 2011, according to data compiled by Bloomberg. This has helped drive the Kospi up 14% this year, roughly the same performance as the MSCI Emerging-Markets index (both adjusted for currency moves). Inflows are strong and should remain supportive, but in relative terms, they are likely to be less impressive than in some other emerging-market countries. Korea's central bank may prove to be the main headwind for KRW. First, investors should expect no cyclical support from the Bank of Korea. If anything, the bank could be negative factor for the KRW. Markets appear split about the prospect of easing this year. We think there is a greater chance of a cut, which would surprise some market participants and weigh on the KRW. Import growth has collapsed in recent months, pointing to sluggish domestic demand. Second, the BoK seems to be more sensitive to currency appreciation than many other central banks in the region. The central bank is thought to have already started to buy dollars, even though USD/KRW is still far from the levels seen before the September 2011 selloff. One reason to expect strong action by the BoK -- and another negative for KRW -- is the recent weakness in Korea's trade data. The trade balance shot back into negative territory, falling to levels not seen since early 2009. This was driven by a surprisingly strong contraction of exports by 6.6% year over year in January, which likely helps to explain official concern with the stronger won.
That said, Korea's current account remains in a healthy surplus, and we do not anticipate any funding issues to either banks or the corporate sector. In addition, the key yen/won cross remains very high at around 14.5, which helps Korean exporters compete with Japan in third-party markets. For USD/KRW, the 200-day moving average (currently around 1112) has provided support this month. However, a clean break of the 1117 retracement level would point to a test of the September low around 1061. Upside levels are 1133 and 1139, retracement levels of the 2012 drop in USD/KRW. However, direction is likely to be dictated by external developments near-term.