South Korean Won: Growth-driven recovery offers policy lesson – ING

Chris Turner at ING explains that Korea’s earlier massive portfolio outflows and a weaker Korean Won (KRW) pushed USD/KRW to 1560 in June, despite a large current account surplus. Policy measures, including changes to National Pension Service hedging and access to Bank of Korea FX liquidity, helped. The AI-led export boom has broadened, supporting growth, a July rate hike and greater earnings repatriation. ING sees limited need for USD/KRW to move much below 1400 yet, but views Korea’s turnaround as a lesson for Japanese authorities on strengthening domestic investment conditions.

Won recovery anchored in domestic growth

"For much of this year, Korea has struggled with massive portfolio outflows and a weaker Korean won, which sent USD/KRW as high as 1560 in June. Those portfolio flows were stemming from foreign selling of Korean equities ($100bn sold year-to-date) and domestic residents putting money offshore. Korea's huge current account surplus on the back of the semiconductor boom did not seem to matter."

"Yet the turnaround in the won, with USD/KRW now trading under 1400, looks to have been driven by the Korean growth story. The AI investment and export boom has filtered into broader parts of the economy and delivered another strong 2Q GDP print of 0.6% quarter-on-quarter – helping the Bank of Korea to hike 25bp to 2.75% in July. It now seems exporters have greater confidence to repatriate more of their foreign earnings, where the current account surplus can run as high as $50bn on a monthly basis."

"The turnaround in the won is a reminder of the need for an attractive investment environment at home. We highlight a recent BoK research paper on the subject in a recent opinion piece. It is not clear that USD/KRW needs to go a lot lower than 1400 just yet."

"After all, foreigners still seem to be selling Korean equities. But the turnaround in Korea may be a useful lesson for Japanese authorities. Creating an attractive domestic investment environment at home – both through growth and higher interest rates – is an effective route to strengthen the domestic currency."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)