Another Taiwan Dollar? Hedge Funds Bet on Korean Won Rally

TradingKey - According to Bloomberg, hedge funds are ramping up bets in the options market, speculating that the South Korean won will mirror the recent dramatic surge of the Taiwan dollar. 

Data from the Depository Trust & Clearing Corporation (DTCC) indicates that last week's trading volume for won options soared to its highest level this year. Barclays reports an increased demand for put options on the dollar-won pair from hedge funds.

Earlier this month, the Taiwan dollar experienced one of its wildest spikes in history, climbing 9% over two trading sessions. On May 5, it recorded its largest single-day gain since 1981, reshaping market expectations for Asian currency rates.

Forex and options investors anticipate a similar brief but intense rally for the won. Last year, the US added South Korea to its foreign exchange monitoring list, with Taiwan already on it.

Moreover, the current relative ease in US-China relations has made investors more optimistic about a cooling in the global trade war. Given South Korea's persistent trade surplus with the US, the forex market broadly expects that South Korea might tolerate a strong won, forcing the Trump administration to potentially accept a weaker dollar.

For investors, the won has become the preferred currency to bet on shifts in US-Asia trade dynamics and to hedge against dollar depreciation. Consequently, the market views the won as likely to follow in the footsteps of the Taiwan dollar.

Mukund Daga, head of Asia forex options at Barclays in Singapore, notes considerable demand from short-term funds for digital and vanilla put options on the dollar-won pair. Last Wednesday, DTCC data showed demand for put options on the dollar-won exceeding call options, with a ratio of 3:2, indicating bullishness on the won. The "risk reversal" index, which measures the cost of hedging against declines versus gains for the dollar-won over the next month, hit near a 21-year high last week.

Saurabh Tandon, head of global forex options at Standard Chartered, mentioned that since the Taiwan dollar's substantial appreciation, dollar-won digital options and put spreads have been very active. Recent currency-related commentary has further sparked market interest. Ivan Stamenovic, head of G10 currency trading for Asia-Pacific at Bank of America, remarked on the market's insatiable appetite for holding won options.

In fact, the won has already strengthened last week, emerging as the standout performer among Asian currencies.