Reversed Korean won?

Reversed Korean won?

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The recent accelerated appreciation of the RMB has attracted market attention. Today, USDCNH also once rose to the 7.00 mark in late Asian trading. However, today the star performer is definitely USDKRW, as a sharp drop allowed many KRW long holders to finally break even.

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I. Why did the Korean Won suddenly appreciate?

A coordinated effort by “Finance + Pension Fund + Central Bank” to defend the value of the Won. Around 8:00 am, the National Pension Service of Korea (which holds about $540 billion in overseas pension assets) launched a new round of strategic forex hedging operations, causing USDKRW to immediately drop by 10 big points. Afterwards, the Bank of Korea and the Ministry of Finance jointly issued statements supporting the Won.

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The Ministry of Finance of Korea announced a new measure planning to provide capital gains tax breaks to individual investors who sell overseas stocks and remit the funds back to Korea for long-term investment, to encourage repatriation of Won funds. The Bank of Korea also recently restarted its currency swap agreement with the National Pension Service (about $65 billion), decided to waive the foreign exchange stabilization tax (levied on foreign currency liabilities of banks and other financial institutions), and to pay interest on statutory foreign currency deposit reserves held by financial institutions, thereby enhancing the attractiveness of Korea's financial system to overseas funds.

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USDKRW spot fell sharply from near 1481 during the day, once reaching 1444, a maximum drop of about 2.5%.

II. What were the previous depreciation drivers?

There are mainly three factors:

  • First, the Korea-US trade agreement includes a large number of outward investment and goods procurement clauses. For example, $350 billion in investments in the US, including $150 billion in shipbuilding and $200 billion in semiconductors and other tech fields; procurement of $100 billion worth of US energy products over the next four years; and $25 billion of US military equipment by 2030.
  • Second, cross-border equity flows. The Korean stock market has risen as much as 70% year-to-date, and since November, foreign capital has been clearly taking profits and pulling out. At the same time, Korean residents and companies have actively invested overseas: from January to September, outward securities investment reached $99.85 billion, more than three times the inward investment.
  • Third, economic headwinds persist. The IMF has cut Korea’s GDP growth forecast this year to 0.9%, which is low in Asia. Korea’s December consumer confidence index fell, showing domestic demand remains weak. Monetary policy has also paused interest rate cuts due to exchange rate pressures, losing room for policy support for the economy.

III. Outlook?

Going forward, as long as US stocks maintain strength, even if the dollar index trends lower, it still retains some resilience. Korea’s biggest structural problem—continuous outflows of funds to the US—remains unresolved. Recent regulatory policies may improve cross-border securities fund preferences to some extent, but fundamentally enhancing the attractiveness of domestic assets still requires boosting local economic growth. Therefore, in the short term, USDKRW may continue to fluctuate at high levels, making it difficult to significantly reverse the depreciation trend. The 1460-1480 range will enter the central bank's intensive intervention zone, and the 1420-1440 range will also be tough to breach downwards.

Source: Morning FX Market

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