Goldman Sees Won Risk as Latest Tension Is Different

  • Currency down 5.3% this year in worst performance in Asia
  • Won may fall beyond 1,300 a dollar forecast, says lender

The won may not shrug off the latest bout of tension on the Korean peninsula like it has in the past, according to Goldman Sachs Group Inc.

The currency has fallen the most in Asia in February as North Korea’s firing of a long-range rocket on Feb. 7, a month after its fourth nuclear test, drew condemnation and the threat of fresh sanctions from the international community. Seoul’s closure of the jointly run Gaesong industrial park was a “swift and more direct” response than in the past, Goohoon Kwon, an economist and strategist at Goldman in Hong Kong, wrote in a report Thursday.

“While the markets seemed to dismiss the inherent risks from recent developments given the repeated history of provocations, we believe this time may be different,” he said in the note. The lender is maintaining its forecast for the won to drop 4.9 percent to 1,300 a dollar in 12 months, but a further escalation of geopolitical tension could see the currency weaken more than that, said Kwon.

The won depreciated 0.4 percent to 1,238.77 a dollar at the close in Seoul, according to data compiled by Bloomberg, taking its decline this year to 5.3 percent, the most in Asia. The currency will end the year at 1,240, according to the median estimate in a Bloomberg survey of economists.

Tail Risk

The heightened tension comes as the won has already been hurt by a slowdown in China, which takes 31 percent of South Korea’s exports, and $2.7 billion of outflows from its stock market this year. The nation’s sovereign bonds have benefited from the risk-off environment, with the 10-year yield falling 26 basis points to 1.81 percent in 2016.

There’s a chance that tougher and more effective international sanctions could be imposed on North Korea this time and the most important signpost will be upcoming negotiations in the United Nations’ Security Council, said Goldman’s Kwon. The rocket launch has also prompted South Korea to say it would be willing to discuss installing a U.S. missile defense system on its territory, a move long opposed by China.

“There is a considerable amount of tail risk with many moving parts," said Kwon.

(Corrects won forecast in second deck headline.)
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