Last month, the net purchases of overseas stocks by domestic individual investors hit an all-time high. As the won-dollar exchange rate threatens the 1,480-won level against the dollar, the flow of funds into overseas markets is being cited as a factor weakening the won.
With a structural weak-won outlook prevailing and analysis suggesting limited room for further gains in the won-dollar exchange rate, there is advice that investors should pair asset allocation with a currency hedge strategy.
On the 25th in the Seoul foreign exchange market, the won-dollar exchange rate closed weekly trading at 1,472.4 won, down 4.7 won from the previous day. Although it was stable for the day on hopes for a U.S. rate cut overnight and signals of intervention from currency authorities, it still held in the 1,470-won range. The won-dollar exchange rate, which has risen more than 52 won this month alone, closed at 1,477.1 won on the 24th, marking a record high in about seven months since Apr. 9 (1,484.1 won).
According to Bloomberg, strategists at global investment bank Citigroup assessed that the won-dollar exchange rate is threatening the 1,480-won level and has approached a "threshold" that would trigger dollar selling by the National Pension Service. The analysis says that if it exceeds 1,480 won, up to $50 billion could be supplied to the market as the National Pension Service undertakes "strategic currency hedging," such as partially selling overseas assets.
The reason 1,480 won is cited as the "threshold" is related to the trigger conditions for the National Pension Service's strategic currency hedge. Since 2001, the National Pension Service has activated strategic currency hedging when the won-dollar exchange rate exceeds an extreme level outside the 99% confidence interval for more than five trading days, and this band is currently estimated at 1,482 won.
In fact, when the won-dollar exchange rate hit 1,479.4 won intraday, currency authorities and the National Pension Service formed a "four-way consultative body on the exchange rate" on the 24th to stabilize the rate. Plans to use the National Pension Service as a firefighter for exchange-rate stability—through its strategic currency hedge and an expansion of the foreign exchange swap contract between the Bank of Korea and the National Pension Service—are expected to be discussed in earnest.
If the National Pension Service steps in in earnest, the drop in the won-dollar exchange rate could be significant. In fact, when the rate broke through 1,460 won in January this year, a wave of forward dollar selling—believed to be by the National Pension Service—flooded the market, and the rate fell more than 16 won in a single day. The market is betting that if 1,480 won is breached, a short-term correction of around 30 to 50 won could occur this time.
Meanwhile, there are growing remarks that the expansion of overseas investment by Korean retail investors trading U.S. stocks is acting as a structural pressure for capital outflows of the won. According to the International Finance Center, domestic individual investors posted net purchases of $6.81 billion in overseas stocks in October alone. It is the largest since related statistics began in 2011.
Of that, net purchases of U.S. stocks came to $6.85 billion, indicating that domestic investors recorded net buying in the U.S. stock market for four consecutive months. During this period, domestic investors most heavily bought IonQ, a quantum-computing related stock; Nvidia, the global bellwether in semiconductors; Iris Energy (IREN), a bitcoin miner; and "BMNU," an exchange-traded fund (ETF) that doubles the daily moves of Bitmain.
Wi Jae-hyeon, a researcher at NH Futures Research Center, said, "Despite a weaker-dollar outlook for next year, a trend rise in the won-dollar exchange rate is expected," adding, "Overseas investment overly skewed toward stocks and the sluggish dollar-selling demand from exporters due to the agreement on investments in the United States are pushing the rate higher." However, Wi explained that rates that climb on supply-demand factors can also snap back quickly.
Given this, there is advice that domestic investors should pair currency hedge strategies rather than bet only on the direction of the exchange rate. An economist in the foreign exchange market said, "Variables remain depending on government policy, but at the current level, the room for further gains in the won-dollar exchange rate does not look large," adding, "In the asset allocation process, it is desirable to keep a certain portion as a currency hedge."