Won Drops With Kospi as North Korea Conducts Hydrogen Bomb Test

  • Nuclear test is fourth by North, second under Kim Jong Un
  • Test in 2013 shows market impact will likely be brief: Baring

The won slid to a three-month low and South Korean shares declined as North Korea said it successfully tested its first hydrogen bomb.

The currency fell 0.8 percent to close at 1,197.20 a dollar, the weakest since Sept. 29, data compiled by Bloomberg show. It extended losses, having earlier depreciated after China cut its reference rate for the yuan. The Kospi index of shares closed 0.3 percent lower after dropping as much as 1 percent, while makers of defense products such as Speco Co. surged. Ten-year bonds rose, pushing their yield down two basis points to 2.04 percent.

South Korea’s government will prepare steps to stabilize markets if necessary, Jeong Chan Woo, vice chairman at the Financial Services Commission, said at a meeting of top economic officials Wednesday. The Bank of Korea expects North Korea’s test to have “limited negative impact,”the authority said in a statement after a meeting to discuss the event. Risks from China’s slowdown and emerging markets remain the real issues, said Park Jun Seo, a foreign exchange official at the BOK.

"The geopolitical event in Korea is creating volatility in the won, and that’s been exacerbated by the yuan’s drop against the dollar," said Eddie Cheung, a foreign-exchange strategist at Standard Chartered Plc in Hong Kong. "Geopolitical events tend to have a short-term impact on the market."

Hydrogen Device

The regime in Pyongyang detonated a hydrogen device at the Punggye-ri underground test site in the far northeast, its official Korean Central News Agency said. The explosion was first detected as a magnitude 5.1 earthquake by the U.S. Geological Survey. 

A 4.9-magnitude quake in a similar location was recorded before confirmation of North Korea’s third nuclear test in February 2013. That year, South Korean markets initially dipped after the news of an artificial earthquake. The won ended the day 0.5 percent stronger, while the Kospi closed 0.3 percent lower.

The impact on Korean markets will likely prove short lived, as has been the case after prior weapons tests in the North, according to Hyun Choi, head of equities at Baring Asset Management Korea Ltd., which oversees about 8.5 trillion won ($7.1 billion).

Temporary Impact

"When North Korea conducted nuclear tests previously, the market was impacted for a week at most," he said from Seoul. "The situation with North Korea is much different from the 90s when the two Koreas had hostile relations. North Korea has not recently threatened Seoul with nuclear weapons."

Speco, which makes military products, closed 16 percent higher, after jumping by a record 30 percent earlier. Firstec Co., a weapon maker, rose 2.9 percent to close at a two-month high.

Hyundai Merchant Marine Co. fell 4.7 percent to the lowest since August 2003. The firm is the largest shareholder of a company that operates a jointly run resort in North Korea.

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