Korea Investment & Securities warned on the 13th of potential sharp won appreciation despite the ongoing rise in the USD/KRW exchange rate, citing an abnormal divergence where the foreign currency funding market shows dollar surplus while the FX market exhibits dollar shortage. Analyst Moon Da-woon stated that exchange rate rise expectations are driving self-fulfilling flows as companies and investors delay dollar sales and accelerate purchases. The report noted that the divergence between the two markets is likely to resolve in favor of won appreciation, similar to how rising jeonse prices eventually lift housing transaction prices in real estate markets.
Foreign Currency Funding Market Shows Dollar Surplus Amid FX Market Shortage
Moon Da-woon diagnosed that the foreign currency funding market and FX market are currently moving in opposite directions. Dollar procurement costs in the foreign currency funding market have fallen to historically low levels with the dollar premium turning negative, while the FX market is experiencing intensified dollar shortage pushing the USD/KRW exchange rate higher. The analyst explained that dollars are not particularly scarce in the foreign currency funding market, whereas the FX market is seeing dollar shortage driving rapid exchange rate increases. On the 10th at 3:30 PM, the won/dollar exchange rate stood at 1,501.4 won, down 4.7 won. KOSPI closed at 7,475.94, up 184.03 points (2.52%) on the 10th, while KOSDAQ rose 43.43 points (5.47%) to 837.43.
Hanwha Ocean and SK Hynix Expand Dollar Supply
Moon identified factors that could lower exchange rate rise expectations. Hanwha Ocean recently expanded currency hedging by selling $2 billion in currency forwards. SK Hynix plans to use approximately 40 trillion won raised through ADR listing for domestic investment, which is expected to expand dollar supply. The analyst also cited increased dollar inflows from strong semiconductor exports, foreign exchange demand for August corporate tax interim payments, and potential foreign capital inflows following World Government Bond Index (WGBI) inclusion as exchange rate stabilization factors.
Semiconductor Exports and Tax Payments May Trigger Exchange Rate Reversal
Moon stated that while it is difficult to predict when or through what event exchange rate rise expectations will break, the inflection point in exchange rate expectations is likely to form as the government's foreign exchange supply measures and major companies' dollar supply materialize. The analyst noted that the reduction of the divergence between the foreign currency funding market and FX market could proceed gradually but could also appear abruptly through unpredictable triggers. Moon added that how far the exchange rate falls in the second half of this year will be an important variable determining appropriate exchange rate levels for next year and the year after.
FAQ
What did Korea Investment & Securities warn about on the 13th?
Korea Investment & Securities warned of potential sharp won appreciation despite the ongoing USD/KRW exchange rate rise, citing an abnormal divergence where the foreign currency funding market shows dollar surplus while the FX market exhibits dollar shortage.
What corporate actions are expanding dollar supply in Korea?
Hanwha Ocean sold $2 billion in currency forwards to expand currency hedging, and SK Hynix plans to use approximately 40 trillion won raised through ADR listing for domestic investment.
