Korean won's Average Break Signals 10-Month Low Looms: Technical Analysis
South Korea’s won may decline 6 percent to the lowest level since July in one to two weeks after the currency dropped beyond its 200-day moving average against the dollar, according to Mitsubishi UFJ Securities Co.
The won on May 19 slid below the key technical level and has stayed weaker since, a bearish signal for the Asian currency, said Minoru Shioiri, chief manager of foreign-exchange trading in Tokyo at Mitsubishi UFJ. Implied volatility also indicates traders see wider price swings in the won, he said.
Korea’s currency may depreciate to about 1,291.79 per dollar, a 61.8 percent retracement of its gain from a low on March 6, 2009, of 1,597.45, to an April 26 high of 1,102.85, Shioiri said, citing a series of numbers known as the Fibonacci sequence.
“People have taken positions to guard against the won’s further decline,” Shioiri said. “The break of the 200-day moving average suggests a possibility of change in the long-term trend.”
The won plunged 1.7 percent to 1,214.65 as of the 3 p.m. close of trading in Seoul from May 20, according to Seoul Money Brokerage Services Ltd. Onshore financial markets were closed on May 21 for a holiday. The last time the currency fell below the average on Dec. 14, 2007, it subsequently dropped 42 percent to a low of 1,597.55 on March 6, 2009.
Implied volatility on one-month options on the dollar versus the won was 25 percent today compared with 11.6 percent at the end of last year, according to data compiled by Bloomberg.
The U.S. currency’s one-month risk-reversal rate against the won rose to 7 percent today, the most among the 10 most- actively traded currencies in Asia, excluding the yen. That indicates a widening premium for dollar calls that allow purchases over puts that give holders the right to sell.
“The volatility shows the won will probably have a big swing and that will be toward its weakness,” Shioiri said. “In the high-volatility environment, the riskier assets will be under declining pressure.”
In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index. Fibonacci analysis is based on the theory that prices rise or fall by certain percentages after reaching a high or low. Other Fibonacci points are 23.6 percent, 38.2, 50 and 76.4 percent.