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Won Snaps Four-Day Gain on Intervention Concern; Bonds Decline

Oct. 21 (Bloomberg) -- The won snapped a four-day rally on concern South Korean authorities will step in to slow the currency’s gains to protect exports. Government bonds declined.

South Korea is monitoring fund inflows and currency moves to identify speculative activities and will prevent “herd behavior,” Finance Ministry Director Kim Seong Wook said Oct. 18. The won touched a nine-month high earlier today amid bets the U.S. Federal Reserve will delay trimming its record stimulus that has spurred emerging-market inflows. A stronger currency erodes the competitiveness of the nation’s exports, which account for around half of its gross domestic product.

“Since the government’s warning last Friday, traders are not betting aggressively on the won,” said Son Eun Jeong, a currency analyst at Woori Futures Co. in Seoul.

The won fell 0.1 percent to 1,062.31 per dollar in Seoul, according to data compiled by Bloomberg. It touched 1,059.75 earlier, the strongest level since Jan. 21. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, rose seven basis points, or 0.07 percentage point, to 6.11 percent.

The first reduction in the Fed’s $85 billion of monthly debt purchases will be pushed back until March after a 16-day government shutdown arising from a budget impasse cut U.S. growth this quarter and interrupted the flow of data, according to a Bloomberg News survey of economists.

Fed Factor

“It is unlikely that the Fed will change its monetary policy stance at least by this year, which may decrease the risk of outflows from emerging markets,” said Hong Seok Chan, a currency analyst at Daishin Economy Research Institute in Seoul. “The pace of the won’s rally may slow as traders are wary of the possible intervention by the authorities.”

The Bank of Korea will take steps to ensure market stability, including injecting liquidity and changing rules on capital flows, if needed, it said in an Oct. 18 report to parliament. Foreign funds have pumped $11.7 billion into local equities since Aug. 22, the last day of net sales, exchange data show.

The yield on South Korea’s 2.75 percent sovereign bonds due June 2016 climbed one basis point to 2.84 percent, according to Korea Exchange Inc. prices.

South Korea sold 1.8 trillion won ($1.7 billion) of 10-year government bonds at a yield of 3.46 percent, the Finance Ministry said on its website today.

To contact the reporter on this story: Yewon Kang in Seoul at ykang51@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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