Resurgent Carry Counts Won as Top Trade on Rate Bets: CurrenciesKyoungwha Kim
The prospect of South Korea’s first interest-rate increase since 2011 is giving the won the world’s best returns in a resurgent market for carry trades.
Purchasing the won using funds borrowed in dollars earned 4.4 percent this quarter through yesterday, while deals paid for in yen made 3 percent, in both cases the biggest gains among 44 currencies. More than half of 27 economists surveyed by Bloomberg expect the Bank of Korea to lift rates this year.
The outlook for higher rates combined with a drop in volatility are burnishing the appeal of the won so much that Bank of Korea Director General Ryoo Sang Dai told Bloomberg News yesterday as it reached the highest level since 2008 that authorities are monitoring the situation and would move to stabilize the currency if necessary. Goldman Sachs Group Inc. and Barclays Plc switched their outlooks on the won last week to predict gains in 2014 instead of the declines they had forecast.
“Besides its appreciation potential, relatively high interest rates add to the allure of the won from a carry-trade perspective,” Wai Ho Leong, an economist at Barclays in Singapore, said yesterday by phone. “The prospect that Korea may be in a position to hike rates earlier than expected is the new twist.”
The won touched 1,021.73 per dollar, the highest since August 2008, before closing little changed at 1,022.76 today in Seoul. It is the best performer among 31 major currencies tracked by Bloomberg since March 31, appreciating 4.1 percent. The yen strengthened 0.2 percent to 101.56 per dollar at 1:32 p.m. in New York.
The won gains have been orderly, with price swings in the won falling yesterday to a five-month low of 6.82 percent, below the 7.54 percent level of JPMorgan Chase & Co.’s emerging-market volatility gauge. In carry trades, where investors buy higher-yielding assets using money borrowed more cheaply elsewhere, lower volatility lessens the chances of profits getting wiped out by currency swings.
The carry trade is a rare bright spot in the $5.3 trillion-a-day foreign-exchange market, where dealers are hurting from the decline in the price swings they exploit for profit.
The low volatility caused by global central banks’ unprecedented monetary stimulus has helped push UBS AG’s V24 Carry Index up by 3.9 percent in 2014, after climbing just 0.4 percent in all of last year. Parker Global Strategies LLC’s Global Currency Managers Index, which tracks the performance of 14 funds it considers the best in class, is down 2.4 percent.
“The won’s volatility has declined and has been an impetus to consider it as a carry trade,” Desmond Soon, the Singapore-based co-head of investment for Asia at Western Asset Management Co., which oversees $469 billion globally, said yesterday in an interview. “The won’s gains are backed by strong fundamentals such as a robust current-account position and ample currency reserves.”
Rising exports are boosting the Asian nation’s economy by swelling the surplus in South Korea’s current account, the broadest measure of trade, to $7.3 billion in March, marking the 25th straight month in the black.
Gains in the won have failed to temper concern that faster inflation will damage the economy. BOK Governor Lee Ju Yeol said on April 10 that he expects inflation to quicken. Fourteen of 27 economists surveyed by Bloomberg expect policy makers to lift rates from a 3 1/2-year low of 2.5 percent this year.
The central bank may resist raising rates to avoid allowing the won to strengthen to levels that may hurt growth, according to Yii Hui Wong, a currency and interest-rate strategist in Singapore at BNP Paribas SA. There’s speculation that policy makers stepped back from intervening to weaken the exchange rate in recent months.
“The BOK seems willing to accommodate won appreciation for now, but we doubt it will have the stomach for how much the currency could rally,” Wong said in a May 2 report. “An appreciating won should force the hawks to bite their tongue.” She predicts the currency will weaken to 1,050 by year-end.
Ryoo told Bloomberg News by phone yesterday that authorities would take steps to stabilize the won if they determined that volatility is too much. Ryoo said he couldn’t comment on whether the central bank intervened or would do so.
Implied three-month volatility in the won has fallen from as high as 9.21 percent on Feb. 4 and 29.67 percent in May 2010, data compiled by Bloomberg show. The currency has already surpassed the median year-end estimate of 26 strategists surveyed by Bloomberg, which puts it at 1,045 per dollar.
Barclays raised its six-month forecast on April 29 to 1,020 per dollar from 1,050. That was a day after Morgan Stanley recommended investors buy the won with a target of 1,000. UBS AG’s Chief Asia Economist Duncan Wooldridge said in a note today he sees the won approaching 975 in the second half, reversing an earlier prediction for it to weaken to 1,075.
Goldman Sachs lifted its three-month estimate on April 30 to 1,010 from 1,080, and its 12-month prediction to 1,070 from 1,100. The bank, which advised investors in January to sell the won on the risk of a rate cut, now predicts the benchmark seven-day repurchase rate will remain at 2.5 percent through the first half of 2015 before rising to 2.75 percent in the third quarter.
While all 16 strategists surveyed by Bloomberg News expect the central bank to keep borrowing costs unchanged when it meets tomorrow, the case for a rate increase is building.
At the BOK’s April 10 policy review, one board member said the bank should prepare for “normalizing” interest rates once signs of an economic recovery are clear, according to the minutes of the meeting. The central bank raised its estimate for 2014 economic growth to 4 percent from 3.8 percent, and said inflation will quicken to 2.7 percent in the second half, from 1.5 percent in the year through April.
“The won is a good story,” Sue Trinh, a Hong Kong-based strategist at Royal Bank of Canada, said in a May 6 phone interview. “Volatility remains very low and the BOK has for the most part been silent about the gains in the won, which we can take as a green light for it to keep appreciating for now.”