Because of the Middle East war, the won-dollar exchange rate swung in the offshore New York non-deliverable forward (NDF) market. An NDF is a contract promising to buy or sell at a set exchange rate at a specific time, a type of forward. Only the difference between the contracted rate and the spot rate at maturity is traded, and because of this feature, foreign investors often use it for hedge (risk avoidance).
The view is that the sharp moves in the exchange rate in the New York NDF market were driven by Middle East war news reported at night Korea time. Because of this, analysts say the won-dollar rate also jumped in regular transactions on the Seoul foreign exchange market, which opens after the New York NDF market closes.
According to Yonhap Infomax on the 19th, based on the previous month's closing price in regular transactions (9 a.m.–3:30 p.m.) on the Seoul foreign exchange market, the difference between the fair NDF rate and the final quote for one-month dollar-won futures in the actual New York NDF market averaged 12.2 won per day. The fair NDF is calculated by factoring in the interest rate differential between countries to the regular transaction close. It was the widest gap since December 2020 (49.3 won) in five years and three months. At that time, as COVID-19 vaccines were rolled out and expectations grew that the pandemic would end, the global financial market overheated and exchange-rate volatility increased.
Analysts say the two indicators diverged because news related to the Middle East situation was reported at night Korea time and the NDF market reacted immediately. News about U.S. President Donald Trump's comments on the war or Iran's offensive in the Strait of Hormuz came overnight Korea time. Because NDFs are traded in the New York market, they moved right away to such external factors.
Analysts say the wider onshore-offshore exchange-rate gap overnight was reflected intact in regular transactions on the Seoul foreign exchange market the next day. In the previous month on the Seoul FX market, the opening level of the won-dollar rate differed from the prior close by an average of 10.8 won per day. Volatility was the highest since May 2010 (11.4 won), when the eurozone fiscal crisis erupted.
In this regard, Shin Hyun-song, nominee for governor of the Bank of Korea, pointed to offshore transactions including NDFs as a major cause of exchange-rate volatility during a confirmation hearing on the 15th. Shin said, "There seems to be a 'tail wagging the dog' phenomenon because there are many off-balance-sheet derivative transactions." He added, "We need to build liquidity through the internationalization of the won and establish the system within a macroprudential framework," and "we should formalize the NDF market, which is hard to monitor now, and bring it into the system."