South Korean Won: Consolidation zone eyed against US Dollar – Commerzbank

Commerzbank’s Charlie Lay and Dr. Henry Hao highlight South Korea’s strong export-led growth and large current-account surplus as key drivers of Korean Won strength against the Dollar. They note that increased National Pension Service hedging and corporate repatriation have reduced financial-account offsets, and expect USD/KRW to consolidate near current levels as Bank of Korea tightening and prior appreciation already weigh on financial conditions.

Won strength driven by surplus flows

"On the currency, the external backdrop has been supportive for some time, but the key change appears to be how South Korea's large current-account surplus is being recycled. Despite persistent current-account surpluses, KRW remained weak for much of the past year as strong overseas portfolio investment, including largely unhedged NPS purchases, absorbed much of the country's underlying FX inflows."

"More recently, increased NPS hedging and sizeable corporate repatriation flows, including proceeds from a US listing by a major semiconductor company, have reduced this financial-account offset, allowing the exceptionally strong external surplus to translate more directly into a stronger KRW. Expectations of further BoK tightening provide additional, rather than primary, support through the rates channel."

"The July MPC minutes showed broad agreement that further tightening would be needed. The main argument for waiting until October is the recent tightening in financial conditions following strong KRW appreciation and heightened volatility in the KOSPI."

"However, given the magnitude of the recent appreciation, further gains could become more gradual, particularly as the BoK has acknowledged that the stronger won is already tightening financial conditions. We therefore see scope for USD/KRW to consolidate around the 1,350-1,400 area in the near term."

"USD/KRW has fallen sharply since the end of June, from around 1,560 to 1,385, implying KRW has gained over 12% vs USD over this period. The combination of a record current-account surplus and a smaller financial-account offset should remain supportive for KRW."