South Korean Won: Asia outperformer on flows and BoK – Societe Generale

Societe Generale strategists note the Korean Won (KRW) has become Asia’s best performer in early H2, rallying nearly 2.8% as USD/KRW drops from around 1,550 to near 1,500. They link gains to FX conversion flows tied to SK Hynix ADRs and expectations of a 25 bp Bank of Korea (BoK) hike to 2.75%, following a weak first half for KRW.

Won rally driven by flows and policy

"Elsewhere in EM, the KRW has emerged as Asia’s best performer in early 2H, with a gain of nearly 2.8% (spot). The sharp drop from around 1,550 in early July to near 1,500 coincided with profit taking in the KOSPI."

"We recently highlighted the shift in the FX regime from one driven primarily by trade balances to one increasingly influenced by portfolio flows, resulting in a more pronounced inverse correlation between the KRW and KOSPI amid concerns of frothy semiconductor valuations incl Samsung and SK Hynix."

"Paradoxically, the earlier outperformance of the KOSPI had weighed on the KRW as foreign investors trimmed equity exposure to manage concentration risk. The relationship appears less symmetrical during equity corrections. Recent KRW gains have been linked to FX conversion flows associated with the ADR share of SK Hynix."

"Domestically, the KRW has also found support from expectations that the BoK will raise rates by 25bp to 2.75% next week Thursday."

"The rebound follows a difficult 1H when the KRW, alongside the IDR, THB and INR, ranked among the region’s weakest currencies, contrasting with the resilience and safe haven status of the CNY."