Korean Won Set to Strengthen Amid Bond Inflows and Central Bank Decisions
The Korean won is on track to strengthen significantly, approaching a critical psychological level of 1,300 against the US dollar. This anticipated rise is bolstered by robust bond inflows and the prevailing expectation that the Bank of Korea (BOK) will maintain its current interest rates in the upcoming policy meeting.
In the current quarter, the won has appreciated by 4.9% against the dollar, closing at 1,309.6, which is 0.6% stronger than the previous day. Analysts are optimistic, predicting that the won could reach the 1,300 mark by the end of the year, driven by increased foreign investment in South Korean bonds.
Foreign demand for South Korean debt has surged, particularly with the impending decision from FTSE Russell regarding the inclusion of South Korea’s bonds in its global debt index. While economists anticipate a slowdown in inflation this week, which could open the door for a potential rate cut by the BOK on October 11, Governor Rhee Chang-yong has indicated that concerns over financial stability may lead to a prolonged hold on rates.
Currency strategist Shaun Lim from Malayan Banking Bhd noted, “We may hear discussions about monetary easing in the upcoming meeting, but an actual rate cut seems unlikely.” Lim forecasts the dollar-won exchange rate to drop to 1,300 by year-end, attributing this to converging growth and yield differentials between the United States and South Korea.
The Federal Reserve has recently initiated its easing cycle with a significant 50 basis-point cut. Even if the BOK decides to loosen its monetary policy next week, the won may not experience a substantial rally due to the Fed's plans for further easing this year.
FTSE Russell is set to announce its decision on October 8 regarding the inclusion of South Korean bonds in its global debt index. Lim suggests that such an inclusion would likely lead to a lower dollar-won exchange rate. Vice Finance Minister Kim Beom-seok has stated that the country has established the necessary frameworks since being placed on a watchlist for potential inclusion two years ago. However, institutions like Goldman Sachs predict that Korean bonds may not be added to the FTSE index until 2025, with other market participants also highlighting the risk of delays.
Ken Cheung, chief Asian FX strategist at Mizuho Bank, believes that bond inflows will persist even without index inclusion, especially following the Fed's rate cuts. This quarter has seen global funds purchasing $15.3 billion worth of South Korean bonds, which supports the won amid concerns over equity outflows due to potential impacts on chipmakers from AI valuations.
Peter Chia, an FX strategist at United Overseas Bank Ltd. in Singapore, remains optimistic about the won but suggests that it may take until early 2025 to reach the 1,300 level. He factors in the upcoming US elections, predicting that uncertainties surrounding a potential Trump victory could drive near-term demand for USD, influenced by inflationary effects of his proposed policies or safe-haven considerations.