Won Falls Prey to Outflows as Locals Join Foreigners’ Exodus

At first glance, the weakness in South Korea’s won is an anomaly. Risk appetite is picking up but the currency is heading south.

The won, which is susceptible to swings in global sentiment, has dropped almost 2% versus the dollar since the start of the year. It’s underperforming all its emerging Asian peers just as global growth bets are gaining traction.

Fund flows may explain why. Domestic investors bought a net $6.2 billion of overseas bonds and stocks in January, a record in data from the Korea Securities Depository dating back to 2011. Foreign money managers also offloaded a net $5.3 billion of local stocks in the last week of January, the biggest outflow for the period since 1999.

“Abundant liquidity, a reduction in domestic investment options due to tighter real estate regulations and a pursuit of returns without a cap are driving South Koreans to invest abroad,” said Kim Dong Young, a general manager of the currency trading team at Mirae Asset Daewoo Co.

Won Falls Prey to Outflows as Locals Join Foreigners’ Exodus

Kim estimates that demand for the greenback arising from overseas investments may total as much as $50 million to $100 million daily.

The won’s weak spell is likely to be a relief for policy makers and manufacturers who have complained that the currency is too strong. But even at the current level of around 1,107 per dollar, the won continues to exceed exporters’ pain threshold of 1,133.

Still, the currency’s weakness may be fleeting. Global funds are returning to the nation’s equity market, scooping up $1.1 billion of shares so far this month after withdrawing over $5 billion in January.

Won Falls Prey to Outflows as Locals Join Foreigners’ Exodus

Stocks have a fairly close correlation with the exchange rate. The benchmark Kospi index was responsible for about 43% of weekly fluctuations in the dollar-won exchange rate in the past two years, a Bloomberg study shows. A 1% increase in the equity gauge could lead to a 0.2% decline in the currency pair, according to the analysis.

Some analysts are also calling for a rebound in the won. Jeon Seungji, an analyst at Samsung Futures Inc., sees the currency strengthening through mid-year as exports improve while Mirae’s Kim predicts that a continued decline in the dollar will provide support.

“The Korean won is highly geared to global growth,” Goldman Sachs Group Inc. strategists including Danny Suwanapruti wrote in a note this month. “We expect Korean exports to remain robust this year, driven by technology-related demand.”

©2021 Bloomberg L.P.

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