Korean Won Posts Biggest Weekly Decline in Six; Bonds Gain

South Korea’s won posted its biggest weekly decline in six after the central bank left interest rates unchanged yesterday and geopolitical risks increased. Government bonds climbed.

Overseas investors pulled $182 million from local stocks yesterday, the most since January, exchange data show. That took weekly outflows to $360 million. North Korean leader Kim Jong Un this week urged his military to boost readiness against the U.S. and said he’s confident the armed forces could set a “sea of fire” on a South Korean island, the North’s media reported.

“The North Korean factor continues to weigh on the market as a potential risk, keeping the won lower,” said Lee Dae Ho, an analyst at Hyundai Futures Corp. in Seoul. “Foreign investors’ net sales following such concerns have weakened the currency.”

The won fell 1.8 percent to 1,110.95 per dollar in Seoul, according to data compiled by Bloomberg. That was the biggest weekly drop since Feb. 1. The currency touched a five-month low of 1,110.61 yesterday and rose 0.2 percent today.

The Bank of Korea held its benchmark seven-day repurchase rate at 2.75 percent for a fifth month, a decision predicted by 12 of 16 analysts surveyed by Bloomberg. Four forecast a cut of 25 basis points, after similar moves in July and October.

North Korea

Haruhiko Kuroda was confirmed today as Bank of Japan governor, with Kikuo Iwata and Hiroshi Nakaso as his deputies, ushering in a new central bank leadership team that may push for additional monetary stimulus that could further weaken the yen, threatening Korean exports.

In the near term the won is likely to be under some pressure, Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB, wrote in a note today. “Risks include political concerns related to North Korea, potential for further weakening of the Japanese yen, and worries that monetary tightening in China will cause a slowdown in Korea’s biggest export market.”

One-month implied volatility for the won, a measure of expected moves in the exchange rate used to price options, rose 16 basis points, or 0.16 percentage point, to 9.17 percent.

The yield on the 2.75 percent bonds due December 2015 declined two basis points to 2.61 percent, according to prices from Korea Exchange Inc. The yield dropped five basis points this week.

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