Won Volatility Drops After Central Bank Warning on Herd Behavior

Volatility in South Korea’s won declined to the lowest level this year after the central bank said it is closely watching the market.

South Korean authorities are monitoring trading for signs of herd behavior, Finance Minister Hyun Oh Seok said in Sejong yesterday as the currency advanced to the strongest level since 2008. China’s overseas shipments rose 0.9 percent in April from a year earlier, compared with the 3 percent drop forecast in a Bloomberg survey, official data showed today. Overseas investors sold $769 million more of local equities than they bought this month, exchange data show.

One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, dropped 12 basis points, or 0.12 percentage point, to 5.88 percent as of 6:04 p.m. in Seoul. That’s the lowest level since Dec. 10. The won closed little changed at 1,022.76 per dollar in Seoul, data compiled by Bloomberg show. It reached 1,022.60 yesterday, the the strongest level since August 2008, and touched 1,021.73 today.

“The authorities are giving verbal warnings but seem to be less active in actual currency-market intervention,” said Jude Noh, chief currency trader at Suhyup Bank in Seoul. “I expect the short dollar trend to continue.” A short position is a bet an asset will drop in value.

Purchasing the won using funds borrowed in dollars earned 4.3 percent this quarter, while deals paid for in yen made 2.9 percent, in both cases the second-biggest gain among 44 currencies. The Bank of Korea will hold the benchmark rate at 2.5 percent tomorrow, unchanged since May 2013, according to all 16 economists surveyed by Bloomberg News.

Government bonds were little changed, with the yield on the 3.125 percent notes due March 2019 at 3.13 percent, according to Korea Exchange data.

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