South Korea’s won completed the biggest monthly drop in Asia as the government’s decision to cut its economic growth outlook fueled bets the central bank will lower borrowing costs to aid the recovery.
The currency weakened for the first month since January as the official 2014 expansion estimate was trimmed to 3.7 percent from 3.9 percent on July 24. Sovereign bonds gained, with the three-year yield falling for a third month, after Finance Minister Choi Kyung Hwan unveiled an 11.7 trillion won ($11.4 billion) stimulus package. Choi said yesterday exchange-rate volatility is hurting local exporters.
The won weakened 1.6 percent from June 30 to 1,027.78 per dollar at the close in Seoul, posting the biggest loss among 11 Asian currencies tracked by Bloomberg. It fell 0.3 percent today. The won rallied 5.2 percent last quarter, the most among 31 major currencies amid current-account surpluses.
“Rate-cut expectations and the fear of central bank intervention are the two main reasons for the won’s underperformance,” said Ju Wang, a Hong Kong-based strategist at HSBC Holdings Plc. “Exporters are offering dollars on any upticks in the exchange rate and the trade surplus is also large. We think the underperformance won’t last for too long.”
South Korea’s overseas sales probably increased 3.8 percent this month from a year earlier, with the trade surplus at $3 billion, according to the median estimates of economists surveyed by Bloomberg before official data due tomorrow. The excess in the current account, the broadest measure of trade in goods and services, was $7.9 billion in June, the second biggest this year, central bank figures show.
The Bank of Korea’s decision to hold its benchmark rate at 2.5 percent on July 10 wasn’t unanimous, with one board member dissenting, according to the minutes of the meeting released July 29. Among members who voted for the status quo, one said there was room for easing and another said policy should aid the recovery.
The minutes “confirm a dovish monetary policy committee,” Kwon Young Sun, the Hong Kong-based economist at Nomura Holdings Inc. said in a July 29 report. Nomura expects the BOK to cut borrowing costs to 2.25 percent when it next reviews policy on Aug. 14.
One-month implied volatility in the won, a gauge of expected swings in the exchange rate used to price options, rose 161 basis points this month, or 1.61 percentage point, to 6.26 percent. The Kospi index of shares rallied 3.7 percent in July, and reached the highest close in three-years yesterday.
The yield on the June 2017 notes fell 16 basis points since June 30, and rose one basis point today to 2.52 percent, Korea Exchange Inc. prices show. The yield on 10-year bonds dropped 11 basis points for the month and increased two basis points today to 3.05 percent.