The won-dollar exchange rate against the U.S. dollar broke above 1,560 won, the record high since the financial crisis, sending exchange-traded funds (ETFs) that bet on a stronger dollar to hefty returns. By contrast, some retail investors are wagering on a pullback after the short-term spike by buying inverse ETFs that bet on dollar weakness. Analysts said investors should be cautious as exchange-rate volatility could widen for the time being.
According to the financial investment industry on the 9th, during overnight trading in the Seoul foreign exchange market on the 6th, the won-dollar rate surged intraday to 1,561.5 won, the highest level since March 2009 during the global financial crisis. The rally cooled somewhat after strong verbal intervention by the foreign exchange authorities the previous day, but it remains well above the 1,500-won level.
The high exchange-rate trend has been fully reflected in related ETF returns. From the 7th of last month through the previous day, TIGER U.S. Dollar Futures Leverage and KODEX U.S. Dollar Futures Leverage each posted gains in the 11% range. Plain dollar-futures ETFs such as KODEX U.S. Dollar Futures and KIWOOM U.S. Dollar Futures also delivered returns of around 5%. As the won kept weakening, products that invested in dollar strength benefited.
The same phenomenon is seen in U.S. benchmark index ETFs. Currency-unhedged ETFs, which reflect exchange-rate moves as is, outperformed currency-hedged ETFs. KODEX U.S. S&P 500 rose more than 6% over the past month, while KODEX U.S. S&P 500 (H) failed to reach even 1%. Nasdaq 100 ETFs also saw a wide performance gap between currency-unhedged and currency-hedged products. U.S. stock gains were augmented by currency gains from the weaker won.
However, retail investors made the opposite choice. Some have been steadily buying inverse ETFs that bet on a weaker dollar. Dollar inverse ETFs make returns when the won-dollar rate falls. With the rate already up a lot, they appear to be buying early on the view that upside potential is limited.
In fact, net purchases by individuals this month of six domestically listed ETFs that inversely track the U.S. Dollar Futures Index totaled about 20 billion won as of the day, according to tallies. In just five trading days, that nearly doubled last month's net purchases (11.5 billion won). Retail investors were net sellers of inverse ETFs in April, when the exchange rate was relatively stable, but returned to net buying after the rate's uptrend took hold in May.
Notably, individual buying has continued even though recent inverse ETF returns have been weak. KIWOOM U.S. Dollar Futures Inverse and KODEX U.S. Dollar Futures Inverse fell around 5% over the past month. The declines in the 2x inverse products, TIGER U.S. Dollar Futures Inverse 2X and KODEX U.S. Dollar Futures Inverse 2X, exceeded 10%.
That said, analysts note that while the exchange rate has indeed spiked in a short period, it is premature to conclude a trend reversal to a decline. Key variables remain, including the Middle East situation, flows of foreign funds, and U.S. monetary policy.
Min Kyung-won, an economist at Woori Bank, said, "With uncertainty in the Middle East persisting and foreigners continuing net selling in the domestic stock market, these factors support the lower bound of the exchange rate," adding, "If foreign selling persists, it could spur dollar-buying demand and limit the extent of any decline in the rate."
Foreign capital outflows, cited as a driver of the recent won weakness, are still underway. Foreign investors have logged net selling for 22 consecutive trading days in the domestic stock market, adding to dollar demand and pressure on the won. In addition, uncertainty over U.S.-Iran talks and increased volatility in global oil prices are cited as factors that make the exchange-rate direction hard to predict.
Park Sang-hyun, a researcher at iM Securities, said, "It is positive that the uptrend in the won-dollar rate has been checked for now, but whether it will shift to a trend decline is still unclear," adding, "Depending on U.S. inflation data, the Federal Open Market Committee (FOMC), and the outcome of U.S.-Iran talks, exchange-rate volatility could widen."
Park added, "Given Korea's economic fundamentals, an exchange rate in the 1,500-won range suggests the won is undervalued, but depending on external variables, it is highly likely to fluctuate in the 1,500s for a considerable period."