Korea Intervention Bets Prompt Aberdeen to Dump Won: Currencies
Aberdeen Asset Management Plc dumped its holdings of South Korean won as the nation’s central bank said last month it may intervene to stem the currency’s gains.
Aberdeen says it sold the won, the best-performing developing-nation currency since June, at 1,061 per dollar. La Francaise Asset Management, which oversees about $51 billion, cut half its Korean bond holdings on Oct. 30 as officials said they may act to counter the “herd behavior” of speculators.
“I’ve taken profits given how much the Bank of Korea is stepping in now,” Edwin Gutierrez, a London-based fund manager at Aberdeen, which manages $10 billion of emerging-market debt, said in a Nov. 4 interview via e-mail. “I just learned not to be too greedy this year. I’m looking for better levels to re-enter.”
Speculation that South Korea has now moved beyond rhetoric and is selling the won echoes moves of policy makers from the Czech Republic to New Zealand. That’s sparking concern about a re-run of 2010’s currency wars, when nations devalued to boost exports. The won’s gains are already hurting Asia’s fourth-biggest economy, which last month lowered its 2014 growth forecast to 3.8 percent, from 4 percent in July.
The won climbed 6.4 percent against the dollar since June 28, the most among 24 emerging-market currencies tracked by Bloomberg. It has been slipping since South Korea started warning about the effects of its strength on the economy, and was at 1,071.45 per dollar in Seoul today, from 1,054.35 on Oct. 24, the strongest since August 2011.
Officials have used the term “herd behavior” to warn off speculators eight times since Sept. 24, the most since the last two months of 2010, according to data compiled by Bloomberg. Finance Minister Hyun Oh Seok told lawmakers Nov. 1 that authorities would act to counter the won’s strength, while Bank of Korea Governor Kim Choong Soo said at the same hearing that action should be taken to curb the currency’s volatility.
Central bank officials in Seoul declined to comment on whether they’ve already intervened to sell won and buy dollars.
“I am not calling for a big weakening of the won,” said Gutierrez. “I still love the medium-term story” of South Korea’s fundamentals, he said. “It’s a case of them wanting to slow the rate of appreciation.”
Policy makers are fighting inflows from investors keen to take advantage of the stability created by a record current-account surplus and the fastest economic growth in two years.
South Korea’s foreign-currency reserves jumped by $6.3 billion in October, the most in two years, to a record $343.2 billion, according to official data. The increase suggests the central bank has been intervening “a lot,” Isabelle Mateos y Lago, the International Monetary Fund’s Korea mission chief, said in a Nov. 1 interview in Seoul.
Won trading on the local spot market reached the equivalent of $9.6 billion on Oct. 24, the day the currency peaked, compared with an average for this year of $8.5 billion, according to data from Seoul Money Brokerage Services Ltd.
The extra activity reflects a “suspected amount of dollar buying” by the central bank, said Kim Doo Hyeon, the chief currency dealer at Korea Exchange Bank in Seoul.
“We love the Korean currency,” Marine Marciano, who manages emerging-market assets at La Francaise in Paris, said by phone on Oct. 30, the day she sold half of her won-denominated holdings. “But the central bank is becoming more vocal.”
Central banks around the world are intervening in foreign-exchange markets or cutting rates, which also tends to weaken a currency, to boost competitiveness. The IMF last month reduced its forecasts for global economic growth to 2.9 percent in 2013 and 3.6 percent in 2014, from July’s projected rates of 3.1 percent and 3.8 percent.
New Zealand has said it may delay interest-rate increases to depreciate its dollar, while Czech policy makers intervened to weaken the koruna for the first time in 11 years last week. Brazil Finance Minister Guido Mantega called such devaluations a “currency war” in 2010.
The New Zealand dollar has tumbled almost 4 percent to 82.15 U.S. cents since reaching a five-month high of 85.44 on Oct. 22, paring its advance in the second half of this year to 6.2 percent, data compiled by Bloomberg show. The Czech koruna fell 4.4 percent against the euro, the most ever, after the central bank sold the currency on Nov. 7.
The U.S. Treasury Department said in an Oct. 30 report it will urge South Korea to limit foreign-exchange intervention “to the exceptional circumstances of disorderly market conditions and to commit to transparency with respect to foreign-exchange intervention.” South Korea is a member of the Group of 20 developed nations, which the previous month pledged to “refrain from competitive devaluation.”
A stronger currency makes exports less competitive. Seoul-based LG Electronics Inc. (066570), the third-largest smartphone maker, posted a 46 percent decline in net income for the third quarter. IBK Securities Co. said last month that the won’s gains may make it difficult for the manufacturer’s earnings to recover.
Global funds poured a record $7.14 billion into Korean stocks in September and $4.73 billion in October, exchange data show. They’re attracted by South Korea’s current-account surplus, which the central bank estimates will reach an all-time high of $63 billion this year. Gross domestic product grew 3.3 percent in the third quarter from a year earlier, the fastest since the final three months of 2011.
Citigroup Inc., the world’s second-biggest currency trader, predicts these inflows will help boost the won to 1,050 per dollar by year-end and 1,010 by the end of 2014. That compares with median estimates in a Bloomberg survey of about 20 analysts of 1,069 and 1,065.
“The won remains under appreciation pressure thanks to robust economic fundamentals,” said Chang Jaechul, a Seoul-based economist at Citigroup. “The won is still attractive. Intervention will be limited to slowing the pace of gains.”