The Japanese Yen and South Korean won have been falling sharply lower in 2022. The won has weakened more than 8% this year, following an 8.6% drop in 2021, which was the fastest annual fall since 2008. The Won on Thursday fell below the much talked about psychological threshold of 1,300 per U.S. dollar for the first time in 13 years, amid global economic recession worries and the dollar’s strength. The won weakened as much as 0.24% in onshore spot trade to touch the lowest since July 14, 2009, at 1300.4 per dollar just after the market opened.
South Korea’s Monetary Policy Board of the Bank of Korea rose the Base Rate to 1.75% on May 22, the highest since mid-2019 as expected. The move means the BOK has risen rates by 100 cumulative basis points since August 2021. However, The Federal Reserve raised rates by 75 bp at their June meeting which has widened the forward spread between the currencies which has fed US dollar buying. With consumer inflation down from 13-year highs the Bank is in one of the most forceful tightening campaigns ever by the bank.
Surging oil prices are also hurting the won as they push up import costs. South Korea posted its first current-account deficit in two years in April. There are also geopolitical risks supporting the greenback, a series of missile launches by North Korea this year is hurting sentiment. Overseas investors have sold a net $4.2 billion of local shares in June.
The South Korean Won Ban on Offshore Trading
The won’s weakness saw Finance Minister Choo Kyung Ho reacts this week saying there’s no change in the basic principle that currency authorities will appropriately take necessary measures if excessive one-sided moves are seen in markets. The South Korean won is not a free-floating currency. There is a ban on offshore trading first instituted in 1999. It has been upheld in support of the Bank of Korea’s ability to protect the value of the South Korean won through open market operations, especially during sudden market downturns.
Trading hours in the won are currently open from 9am to 3:30pm, Korean Standard Time. Only domestic financial institutions can participate, with foreign investors required to carry out transactions through South Korean intermediaries. The possibility of extending trading hours to 24 hours a day and permitting offshore dealers to trade directly is under consideration. This is doubtful in a situation like now with the currency at 13-year lows and memories of the Asian crisis etched in the Bankers memories.
This change would however address overseas investor concerns about the higher costs of trading in South Korean won and the difficulty of trading the currency after markets in Seoul close. South Korea would need to move this way to signal the country’s interest in being recognized as a developed market by Morgan Stanley Capital International (MSCI). Despite the prestige associated with the elevated status and the subsequent financial gains of being in the MSCI this shift brings obvious risks.
A report from Goldman Sachs early this year assessed that it could generate an inflow of US$44 billion for South Korea. It could also lead to improvements in key underlying factors contributing to South Korea’s valuation discount. This would include such as lower levels of corporate governance, high earnings volatility and low medium-term earnings growth. Goldman surmises this could lift the Korea Composite Stock Price Index by 35 per cent
Bank of Korea Moves
The Bank of Korea has risen rates from a record low of 0.5 percent amid uncertainty over the recent spike in COVID-19 cases.
South Korea Monetary Policy Decision (May 26, 2022)
It was the first-rate review after taking office in April for Governor Rhee Chang-yong. He and his monetary policy board voted to raise interest rates by a quarter of a percentage point to 1.75%, the highest since mid-2019. All but one of the 28 analysts polled by Reuters expected a hike.
Governor Rhee last week said the bank could consider big-step interest rate raises in coming months such as 50 basis point hikes, depending on data that will become available around July and August.
The BOK raised its inflation outlook for this year to 4.5% from 3.1% before. Consumer inflation is at a 13-year high. A key measure of inflation expectations among South Koreans rose in May to its highest in nearly a decade.
“Inflation concerns have become more pronounced, with headline CPI growth hitting record levels and unemployment still at a record-low level,” It would be difficult for policymakers to extend the rate-hike cycle into 2023, as we expect the peak-out of inflation in the second quarter of this year. ” said Oh Suk-tae, an analyst at Societe Generale
The BOK expects the economy to expand 2.7% this year, down from its earlier forecast of 3.0% and slowing from an estimated 4.0% for 2021.
From The TradersCommunity News Desk