Won Recovery Seen on BOJ’s Stimulus Reluctance: Market Reversal

South Korea’s won is poised to rebound from its lowest level in two months versus the dollar as Japan’s reluctance to expand stimulus measures reduces the threat of more interest-rate cuts, trading patterns show.

The currency came within 0.03 percent of breaking the upper limit of the dollar-won Bollinger band on June 11, which would imply an imminent reversal. Options traders are paying the highest premium in two months to sell the won, 25-delta risk reversal rates show. What’s known as a Z-score of 2.2 percent of the measure means the premium is more than two units of standard deviation from the 20-day average.

The Bank of Korea, which unexpectedly cut borrowing costs on May 9 to help keep the nation’s exports competitive as the yen tumbled, held its benchmark rate today after the Bank of Japan left policy unchanged on June 11. The won, the fourth worst-performing major currency this year, is getting squeezed by the yen and speculation the Federal Reserve will pare its own stimulus, boosting the greenback at the expense of higher-yielding rivals.

“The won was robbed because of fears that it had to stay competitive,” Win Thin, the global head of emerging-markets strategy at Brown Brothers Harriman & Co. in New York, said in a June 11 telephone interview. “The big fundamental change is that yen weakness had been turned for now, which will allow Korea to claw back some competitiveness back with its exports.”

Turning Points

The South Korean currency fell 0.1 percent to 1,134.4 per dollar in Seoul, and is down 6.2 percent in 2013. The won’s 14-day relative strength index against the dollar rose to 61.3, approaching the 70 threshold that signals a currency has fallen too far, too fast.

The won is testing the upper boundary of its 20-day Bollinger band, indicating that it is due for a reversal. The bands, developed by John Bollinger in the 1980s, are used by technical analysts to identify the turning point in an asset’s trajectory.

South Korea will continue policy efforts to support growth in the second half of the year as the country’s economic outlook remains uncertain amid stimulus measures undertaken by major economies, including Japan, Finance Minister Hyun Oh Seok said before a June 11 meeting with economists in Seoul.

Hyun said May 31 that the yen’s 16 percent decline versus the dollar during the past 12 months is having a “negative impact” on Asia’s fourth-biggest economy. Exports, which account for more than 45 percent of South Korea’s gross domestic product, are being hurt by the yen slide, he said in a presentation to investors. Governor Kim Choong Soo and his board kept the key seven-day repurchase rate at 2.5 percent today as forecast by all 15 analysts surveyed by Bloomberg.

Exports Rise

BOJ Governor Haruhiko Kuroda held back this week from extending the maturity of loans to banks as part of monetary stimulus that has weakened the yen. The Japanese currency has strengthened 4.7 percent to 94.36 per dollar since June 10, paring its decline this year to 8.1 percent.

Korea’s exports unexpectedly rose 3.2 percent in May from a year ago, compared with a 0.4 percent gain in April and the median forecast for a drop of 0.9 percent in a Bloomberg survey.

Overseas sales of wireless telecommunication devices jumped 62.5 percent in May from a year ago, official data showed. The report signals South Korea is weathering the yen’s loss against the dollar during the past year.

“It would remain hard for Japan to inflict a major dent in Korea’s exports as, given the products that they are competing, it would take more than just lower prices for Japan to make significant headway,” Nizam Idris, head of fixed-income and currency strategy at Macquarie Bank Ltd. in Singapore, said in a June 12 interview. “The demand curve for these products, especially electronics exports, will be less elastic than the market is currently fearing.”

Supplementary Budget

The government unveiled a 17.3 trillion won ($15.2 billion) supplementary budget in April to support exporters pressured by a weaker Japanese currency and spur an economy that expanded last year at the slowest pace since 2009. South Korea’s low-growth phase may continue with declines in consumption and investment, the Finance Ministry said in a June 11 statement.

The won fell to a two-month low against the dollar on June 11 after foreign funds sold $1 billion more South Korean shares than they bought this month through June 10, exchange data show.

South Korea’s short-term overseas debt, or securities due in a year, declined 36 percent to $122.2 billion in the first quarter after touching an all-time high of $189.6 billion in 2008, according to the latest central bank data. The nation has reported an average current-account surplus of $4.2 billion per month during the past year, Bloomberg data show.

Asset Cushion

“Current-account surplus and relatively low short-term liabilities provide the nation a cushion in case of any acceleration in fund outflows,” Lim Ji Won, an economist at JPMorgan Chase & Co. in Seoul, said in a June 12 interview.

Lim forecasts the won will strengthen to 1,080 by year-end.

Fed Chairman Ben S. Bernanke said May 22 the U.S. central bank could taper its $85 billion a month of bond purchases if it’s confident of a sustained improvement in the U.S. economy. The won has declined 2.1 percent versus the greenback since the comments, which also negatively affected other higher-yielding currencies.

Brazil’s real has slipped 4.9 percent since Bernanke hinted at tapering, while the South African rand fell 3.8 percent and Mexico’s peso depreciated 3.4 percent.

“The biggest risk to the won is that the dollar continues to rally,” Nick Verdi, a currency strategist at Barclays Capital in Singapore, said in a June 12 interview. “Higher U.S. yields will make emerging-market currencies come under further pressure. It’s a premature to predict the won will turn around.”

Biggest Gainer

As emerging-market currencies have led decliners since Bernanke’s comments last month, the yen has been the biggest gainer out of 17 major currencies tracked by Bloomberg, appreciating 9 percent versus the dollar.

Traders are forecasting wider currency swings as central banks adjust policy measures. Three-month implied volatility in the won, a measure of expected moves in the exchange rate used to price options, touched 11.38 percent today, the highest in almost a year, data compiled by Bloomberg show.

“A medium- to long-term trend for the won’s appreciation remains intact, although the global strength of the dollar increases volatility on the currency in near-term,” JPMorgan’s Lim said. “The won is still undervalued. The market has been over-reacting to chances of the exit plan by the Fed.”

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