Korean won loses allure on signs of intervention
Korean policymakers are likely to step up efforts to weaken the unit as its continued strength against the yen is taking a toll on exporters
South Korea's won is losing its appeal to a growing number of global investors who detect signs that the central bank will step up efforts to weaken the currency as it marches to a third consecutive year of gains against the yen.
The won reached a six-year high of 9.5129 per yen on September 25, near the strong end of the 9.50 to 9.60 range that Seoul-based broker Meritz Securities says local exporters can bear.
"The tolerance for currency appreciation has greatly diminished in South Korea," said Marcelo Assalin at ING Investment Management. "We should see a more interventionist bias going forward."
Bank of Korea governor Lee Ju-yeol has warned that the won's strength against the yen is hurting the economy, and finance ministry officials have said they are closely monitoring the exchange rate. Amundi Asset Management says it is now "underweight" on the won.
Deutsche Bank estimates the Bank of Korea has bought US$33.2 billion over the past four months to limit the won's strength. Buying of US dollars could get "more aggressive", particularly if the yen fell below 110 per dollar, the lender said in a report last month.
Hyundai and Samsung, the country's biggest exporters, both blamed the strong won for declines in their second-quarter earnings. While the Korean carmaker's share of the vehicle market in the United States is stuck at 4.6 per cent, Toyota Motor Corp's has risen to three times that level.
Korean exports shrank 0.2 per cent in August from a year earlier, though an official report yesterday showed a 6.8 per cent expansion for September. Industrial production unexpectedly dropped 2.8 per cent in August, the worst performance since January, data showed yesterday.
The won's 1.2 per cent gain against the yen in September contributed to a 3.6 per cent advance this year and leaves it 56 per cent stronger since the end of 2011. Strategists see it rising to 9.23 per yen by the end of 2015, based on data derived from projections for the currencies against the dollar. The won was at 9.6235 per yen on Tuesday.
While the won has surged against the yen, it has tumbled against the dollar as the Federal Reserve moves closer to raising interest rates. The won fell yesterday to a six-month low of 1,059.60 per dollar, adding to a 4.1 per cent decline last quarter. ING cut its year-end forecast on September 22 to 1,010 from an estimate of 990.
The declines against the greenback offer little solace to exporters, as the won is 24 per cent undervalued against the dollar, according to the magazine's Big Mac index, which measures purchasing power parity based on the cost of McDonald's hamburgers in different countries.
Against the yen, the won is 33 per cent overvalued by the same measure, second only in Asia to the Singapore dollar.
"The won's move against the yen has been excessive," said Goh Khoon, a Singapore-based strategist at Australia & New Zealand Banking Group. "We expect a correction."
Goh sees a decline to 9.80 per yen this year and a further slide to 10.20 by the end of 2015.
Korean policymakers are working against speculators keen to take advantage of the stability created by the country's current-account surplus, which the Bank of Korea forecasts will reach a record US$84 billion this year.
Standard & Poor's raised the country's credit outlook to "positive" from "stable" last month, citing a favourable policy environment and strong finances.
The underlying strength of Korea's economy would make it difficult for policymakers to intervene effectively to weaken the currency, said Ting Wee Ming, the head of Asian fixed income at Pictet Asset Management.
"While Korean officials are becoming more vocal, it's quite hard for them to justify aggressive intervention as Korea's fundamentals are pretty strong," said Ting. "In the medium term, the won will appreciate against the yen."
