Those who have their doubts about the durability of the chip cycle are temporarily silenced

The Bank of Korea has made back-to-back 25bp rate hikes in July and August as inflation remains above target.

The Bank of Korea tightened monetary policy by 25 basis points to 3% Thursday while simultaneously raising growth forecasts. Asia's third-largest economy is being powered by an AI boom that Nvidia's second-quarter results confirmed is far from being over.

Governor Shin Hyun Song raised interest rates by a quarter point for the second consecutive meeting in response to "inflation that is projected to remain elevated for some time due to the increase in energy prices." Korea's consumer price index increased 2.8% in July, slowing somewhat compared to June's 3.2% but nonetheless it remains stubbornly above the bank's 2% target - as it has done for more than five years. Inflation is forecast to cool slightly to 2.7% overall in 2026 and then 2.3% in 2027.

The bank increased its GDP forecasts, with it now expected to show 3.3% growth (versus 2.6% previously) and 2027 growth now projected at 2.9% (versus 2.1% previously). The source of the upward revision is clear: thriving exports, particularly of memory chips.

Only a week ago, Korea announced that in the first twenty days of August alone exports had risen by 56% year over year to $55 billion. Half of that number was generated by chip exports as Korea's trade surplus clocked $14 billion in those three weeks alone. After Nvidia's blowout second-quarter raise and beat delivered Wednesday, analyst expectations for the likes of SK Hynix (KR:000660) and Samsung Electronics (KR:005930), Korea's semiconductor heavyweights accounting for more than half of the Kospi KR:180721 index, will most likely be bolstered.

Investor confidence in the longevity of the semiconductor supercycle has been wavering in recent months and only a week ago Bank of America's fund manager survey for August found that long chip stocks was considered the most crowded trade and the biggest risk for markets by respondents.

The central bank tightening was approved by six members of the board with just one dissent, and the dot plot for future moves suggested at least one more hike is on the cards over the next four meetings. In the press release, Song cited a rise in bond yields globally and weakness in the Korean won (USDKRW) as contributory factors.

The Bank of Korea's dot plot indicates the probability of at least one more 25bp hike in the next six months

The Korean won, like the Japanese yen and the Chinese yuan, is considered to be extremely undervalued by most forex strategists (USDJPY) (USDCNY) with Robin Brooks of the Brookings Institution calculating it to be roughly 20% too cheap.

Strong exports and a narrowing interest rate differential against U.S. Treasurys have led to a modest appreciation of the won since the summer when it hit a seventeen-year low of 1533 against the dollar. The won was fractionally higher Thursday, trading at 1381.

The bullish release from Nvidia (NVDA), plus similarly upbeat earnings from related AI plays Salesforce (CRM) and Crowdstrike $(CRWD)$ gave the Korean stock market some impetus Thursday with the Kospi closing 1.53% better at 6912. After the massive correction in July, the benchmark index is still 26% below its all-time high set earlier this year. Goldman Sachs chief Asian strategist Tim Moe has a target for the Kospi of 12,000 one year from now.

SK Hynix and Samsung local shares both traded up 2.48% and 1.72% respectively while the SK Hynix Nasdaq-listed depositary receipts (SKHY) were more than 4% higher at $164.70 in pre-market trading.

-Jules Rimmer