Yuan Rumbles Through Asia as Trader Recalls North Korea Shelling

Forget currency wars. For Park Dae Bong, a trader at Nonghyup Bank in Seoul, China’s surprise devaluation revived memories of a rather different conflict.

“I think today’s swings were the biggest since November 2010, when North Korea and South Korea exchanged artillery fire,” he said. “It was stop-loss after stop-loss on short-dollar bets. I didn’t expect the dollar-won exchange rate would fly about this much on PBOC action.”

The won closed down 1.3 percent at a three-year low on Tuesday after the People’s Bank of China roiled Asian foreign-exchange markets by slashing the yuan’s reference rate amid a deepening economic slowdown. The Singaporean and Taiwanese currencies weakened 1.3 percent and 1 percent, respectively, as the Asia Dollar Index fell the most since 2009.

The won fell as much as 1.5 percent earlier in the day. That compared with its 3.1 percent intraday tumble on Nov. 24, 2010, the day after North Korea fired artillery at its southern neighbor, killing two soldiers and two civilians.

China’s central bank cut the yuan’s daily fixing by 1.9 percent on Tuesday, spurring a 1.8 percent decline in the yuan that was the biggest since official and market exchange rates were unified in January 1994. The PBOC said it was a one-time adjustment and also announced changes to how it sets the fixing to make it more market-determined. China is the No. 1 buyer of Korean exports.

Market Panic

“There was panic in the currency market after the PBOC action,” said Kim Dae Hun, a Seoul-based currency dealer at Busan Bank. “Offshore players and banks with foreign names seemed to lead the dollar-buying.”

The won closed at 1,178.94 a dollar, according to data compiled by Bloomberg. That took its three-month decline to 7.4 percent, the worst Asian performance after Malaysia’s ringgit.

Nonghyup Bank’s Park estimated the South Korean currency could fall to as low as 1,186 a dollar on Wednesday. One-month implied volatility in the won, a gauge of expected swings used to price options, surged by 100 basis points to 9.93 percent and reached a one-month high of 10 percent earlier.

South Korea will closely monitor financial markets and review its contingency plan to prepare for various possible scenarios, the Finance Ministry said in a monthly report for August released Tuesday.

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