Photographer: SeongJoon Cho/Bloomberg

Asia's Ugliest Currency Finds Fairweather Friends Fueling Rally

  • Won is region's best peformer in March as inflows surge
  • Gains seen temporary as China clouds Korea's growth outlook

Even investors who’ve been buying Asia’s most battered currency this year say the won’s recent gains are unlikely to last.

South Korea’s currency dropped against all its regional peers in the first two months, before recovering to become Asia’s best performer in March as commodities rebounded and China, its biggest overseas market, said there’s no need to devalue the yuan.

The problem is that while the won’s rally from a five-year low in February is extending, a record slump in exports shows no signs of abating, and national champions Samsung Electronics Co. and Hyundai Motor Co. say they anticipate a difficult year amid global turbulence.

The won’s status as a proxy for the yuan is also a burden as Chinese growth slumps and authorities in Beijing consider a tax on currency trading. The won will weaken 6.3 percent to 1,240 per dollar by Dec. 31, completing its first three-year slide in two decades, according to a Bloomberg survey of strategists.

“I am bullish in the short term, or for about three months," said Rajeev De Mello, who oversees about $10 billion as the head of Asian fixed income at Schroder Investment Management Ltd. in Singapore, and who bought the won in recent weeks via non-deliverable forwards and shorter-dated domestic notes. “Medium-term concerns are still there, such as slower growth, lower trade and strong ties with China.”

Won vs. Yuan

Here’s the good news: The won has rallied 6.4 percent in March, data compiled by Bloomberg show, erasing Asia’s biggest drop in the first two months and its worst start to a year since 2009. It climbed 0.9 percent to close at 1,162.44 per dollar in Soul on Friday, and is up 0.9 percent in 2016 after sinking to 1,245.13 on Feb. 29, the weakest since June 2010. China’s yuan has strengthened 1.1 percent this month and is 0.2 percent stronger for the year.

Global funds turned net buyers of Korean assets this month, pouring about $3.9 billion into the nation’s equity and debt, resulting in inflows of $1.3 billion for the year. The won is also supported by a current-account surplus that the central bank estimates at $98 billion for 2016, compared with its earlier projection of $93 billion.

And options traders have become less bearish. The premium traders pay for three-month contracts giving them the right to sell the won over contracts allowing purchases has dropped to 1.30 percentage points from this year’s high of 2.66 reached on Feb. 12, data compiled by Bloomberg show.

"Oversold" Market

Australia & New Zealand Banking Group Ltd. recommends buying the won against the Taiwan dollar using three-month non-deliverable forwards following its slide earlier this year, according to Khoon Goh, a Singapore-based senior currency strategist at the lender. Credit Agricole CIB also favors a similar trade via 12-month forward contracts. The won was “oversold" given that South Korea is one of the stronger Asian economies, said Gary Yau, a Hong Kong-based emerging-markets strategist at the French lender.

But the outlook for Asia’s fourth-largest economy hasn’t improved since the central bank cut its 2016 economic growth and inflation forecasts in January as China’s instability roiled global markets. The Bank of Korea last week held its benchmark interest rate at a record low of 1.5 percent for a ninth month, with one board member calling for a cut to 1.25 percent, leaving Governor Lee Ju Yeol seeking to quell speculation about further reductions by saying they might have limited benefit and that the risk of outflows remains a concern. The BOK will next review its forecasts at its April meeting.

Samsung, Hyundai

Samsung Electronics faces another difficult year after a 2015 plagued by economic turbulence and volatile exchange rates, Chief Executive Officer Kwon Oh-Hyun said in a letter to shareholders this month. The company said in January it expects slowing demand for smartphones and more global economic headwinds this year. Hyundai Motor posted first drop in monthly sales in January and expects the market situation to remain difficult this year amid China’s slowdown and uncertainties in emerging-market currencies.

China’s economy grew 6.9 percent in 2015, the slowest pace in 25 years, and the government is targeting a 6.5 percent to 7 percent expansion this year.

Most Bearish

The most bearish won forecasters predict pain. Morgan Stanley projects a drop to 1,350 per dollar by the year-end, Royal Bank of Canada sees a decline to 1,310 and Rabobank Group to 1,308. Geopolitical risks stemming from North Korea’s threat of an attack following its recent missile and nuclear tests are also “a very short-term negative” for the won, according to Schroder’s De Mello.

Goldman Sachs Asset Management said it added bets against the won, in a note dated March 11. A week earlier it had pulled out of short positions on the currency. State Street Global Advisors expects buyers to emerge at levels between 1,230 and 1,250, according to Ng Kheng Siang, its Singapore-based head of Asia Pacific fixed income.

"None of the fundamental problems that caused the selloff last time have been
resolved," said Michael Every, the Hong Kong-based head of financial markets research for Asia Pacific at Rabobank. “The only thing that stabilized things have been the Fed backing away from interest-rate hikes for now and China actively pretending it isn’t going to devalue its currency when everyone knows it is."

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