USD/KRW: Korean Won Steadies After Surprise GDP Beat
South Korea’s economy grew faster than expected in the second quarter, giving the Bank of Korea (BOK) ample room to raise interest rates further in the months ahead.
Gross Domestic Product (GDP) increased to 0.7% in the second quarter vs. 0.6% in the three months proceeding. The news came as a welcome surprise to analysts, who were forecasting GDP growth of 0.4%. The upbeat data undoubtedly helps the BOK in its fight to tame inflation and stabilize the struggling Korean Won without hampering growth.
Despite repeated interest rate hikes, the Won has dropped 10% against the US Dollar this year as investors pull capital from the country. As a result, South Korea’s trade deficit widened to a record US$10 billion in the first half of 2021. Global investors have sold a net US$11.5 billion of blue-chip Korean stocks so far this year alone. Sadly for the Korean won, they are not the only seller in town.
National Pension Fund Sells the Won
Another factor weighing on the Korean Won is the National Pension Fund (NPS). The fund, the world’s third-largest, plans to increase its allocation of foreign assets over the next year. As such, to fund bond and stock purchases in different currencies, the fund must first sell Korean Won. A local bank Forex trader said:
It is not worries about the health of the Korean economy that pushed the won down. The NPS has basically raised the dollar/won level with a skewed demand for dollars from the onshore market.
The NPS is the Asian nations’ public retirement plan and currently manages a whopping 920 trillion Won (US$700 billion) in assets. And because of its size, it often deploys capital outside of the domestic market. In a double-whammy for the stock market and national currency, the NPS revealed plans to increase overseas holdings by 2.5% next year. At the same time, the fund will reduce its domestic stock portfolio by 0.4%.
USD/KRW Outlook
Ahead of today’s GDP data, several bank analysts expressed concerns over the Won’s prospects. Among those, Citigroup expects the USD/KRW pair to rise 3% to 1,350 Won to the US Dollar within the next three months. Whilst, Bank of America share the same price target but expect it will take until year-end to be reached.
US Dollar to Korean Won Price Chart
