Won Slides to Eight-Month Low on North Korea Tensions

The won slid to the weakest level in more than eight months as heightened risk of conflict with North Korea spurred outflows of foreign funds. Government bonds were steady, while the Kospi index swung between gains and losses.

Global funds sold more stocks than they bought, as they have on all but two days in the past three weeks after South Korean Presidential Park Geun Hye’s office said the communist North may fire a missile around April 10. North Korea warned embassies to evacuate as it won’t be able to guarantee the safety of foreign missions starting April 10 in the event of a conflict, after telling South Korean companies to leave the Gaeseong joint industrial complex by the same date.

“Tensions with North Korea are intensifying, making investors nervous about the situation on the Korean peninsula and prompting sales of South Korean assets,” said Jeon Seung Ji, analyst at Samsung Futures Inc. in Seoul. “Authorities may try to take action if they find market reactions are excessive, while investors will also eye the yen-won movement.”

The won slid 0.5 percent to 1,137 per dollar as of 10:16 a.m. in Seoul after touching 1,138.35, the lowest since July 27, according to data compiled by Bloomberg.

South Korea’s benchmark Kospi index of shares rose 0.2 percent after dropping as much as 0.4 percent. The Bank of New York Mellon Korea ADR index, which measures the American depositary receipts of South Korean companies, sank 2.6 percent, the most since June 21, to 171.80 on April 5.

Regional Chaos

The Kospi index slumped 3.9 percent last week, the biggest drop since May, and the won slid 1.8 percent as North Korea passed a law authorizing “counter-actions” against U.S. aggression, including a nuclear strike. Chinese President Xi Jinping said in a speech yesterday that no country should be allowed to instigate regional chaos.

One-month implied volatility in the won, a measure of expected moves in the exchange rate used to price options, rose 76 basis points, or 0.76 percentage point, to 9.88 percent. The yield on the 2.75 percent government notes due March 2018 was unchanged at 2.54 percent, according to prices from Korea Exchange Inc.

South Korea will deploy a 24-hour monitoring system of financial markets and prepare “strong and swift” responses to stabilize prices if needed as tensions with the North escalate, Vice Finance Minister Choo Kyung Ho said at an emergency meeting with counterparts from the Bank of Korea and financial regulators April 5. The impact of the North’s threats so far has been limited, Choo said.

Yen Weakness

The Kospi 200 Volatility Index, a measure of the cost to protect against equity losses, surged 29 percent last week. Foreign funds sold a net $1.2 billion of Kospi equities last week, data compiled by Bloomberg show. International investors unloaded $3.1 billion of South Korean shares this year, the most among 10 markets in Asia tracked by Bloomberg.

The yen dropped to the weakest level since June 2009 against the dollar as investors sold the currency amid concern Bank of Japan measures to fight deflation, announced last week, will debase the currency.

A rapid weakening of the yen is expected to hurt the price competitiveness of South Korean exports, Bank of Korea said in a biannual report last week. The won strengthened 23 percent against the yen in the past six months.

Before it's here, it's on the Bloomberg Terminal.