Korea Won Intervention Seen Amid 3.8% Surge Against Yen

The won’s rally to a six-year high against the yen is fueling speculation South Korean authorities will intervene to keep exports competitive.

The currency of Asia’s fourth-biggest economy surged 3.8 percent against its Japanese counterpart in the past month, the most among 24 emerging markets. The won reached 9.661 per yen yesterday, the strongest since August 2008, prompting Vice Finance Minister Joo Hyung Hwan to say authorities are closely monitoring the move. Strategists surveyed by Bloomberg predict it will gain 3.1 percent by the end of June.

The won’s advance to levels seen before the 2008 global credit crisis is driven by a record current-account surplus. The yen has weakened as Japan’s efforts to end deflation left markets awash with the currency. Samsung Electronics Co. and Hyundai Motor Co., South Korea’s biggest exporters, have blamed the won’s strength for declines in their quarterly earnings.

“South Korean authorities will try to put a brake on the won’s gains,” Seo Jeong Hun, a Seoul-based research fellow for currencies at Korea Exchange Bank, said in a Sept. 1 phone interview. “Local exporters wouldn’t have expected the yen-won rate to reach current levels,” he said, predicting a 9.50 to 9.60 per yen trading range for the remainder of the year.

The won’s 1.6 percent advance against the dollar is also the best among 24 emerging markets tracked by Bloomberg. The currency has gained 3.2 percent this year and reached 1,008.37 per greenback on July 4, the highest since July 2008.

Diverging Outlooks

South Korea’s current-account surplus, which the Bank of Korea forecasts will reach an unprecedented $84 billion in 2014, widened to $7.9 billion in July, marking the 29th straight month in the black, official data show. Japan’s broadest measure of trade last year had its smallest excess since 1983, International Monetary Fund figures show, and the government reported a record deficit of 1.6 trillion yen ($15.2 billion) in January and a 399 billion yen shortfall in June.

The Bank of Japan maintained its record stimulus on Aug. 8 in an effort to end deflation in Asia’s second-largest economy. By contrast, most economists surveyed by Bloomberg predict the BOK will increase borrowing costs next year as growth improves and the Federal Reserve raises U.S. interest rates.

The central bank cut its benchmark rate to 2.25 percent from 2.5 percent on Aug. 14 and Governor Lee Ju Yeol said the move will support government stimulus measures. Minutes of the meeting show one board member called for no change and another said room for further easing is limited. The finance ministry unveiled a 11.7 trillion won ($11.5 billion) spending plan in July and pledged an expansionary budget in 2015.

Nomura, Barclays

“Monetary policies in Korea and Japan look set to diverge again after the recent BOK rate cut, which should be a one-off,” Prateek Gupta, a Singapore-based currency strategist at Nomura Holdings Inc., said in a Sept. 2 phone interview. “There’s some risk of intervention in Korea given the recent focus on pro-growth policies. But the won is likely to remain an outperformer in the region.”

Nomura predicts the won will strengthen toward 9 per yen in 12 months, according to Gupta. Hong Seok Chan, a Seoul-based currency analyst at the Daishin Economy Research Institute, forecasts an advance to 9.5 by the end of this year, saying intervention can’t reverse the won’s advance as South Korea continues to attract capital. Barclays Plc, however, projects a decline to 9.971 by the year-end and 10.13 by June.

On Guard

The authorities “are more likely to guard against undue appreciation,” Wai Ho Leong, a Singapore-based economist at Barclays, said in a Sept. 2 e-mail interview. “If the overall policy is set at a growth supportive stance, then it is likely that foreign-exchange policy must also be set at a similar tone.”

South Korea’s overseas sales shrank 0.1 percent last month from a year earlier, the first contraction in three months, a government report showed Sept. 1. Finance Minister Choi Kyung Hwan said Aug. 22 a strong currency is hurting exports.

Hyundai Motor reported a 6.5 percent drop in second-quarter profit to 2.24 trillion won on July 24, when Chief Financial Officer Lee Won Hee told a conference call the won’s strength versus the yen was helping Japanese rivals “aggressively market” vehicles overseas. By contrast, Toyota Motor Corp. posted on Aug. 5 a record profit of 587.8 billion yen for last quarter.

Foreign investors have increased holdings of South Korean equities by $6 billion this quarter, more than double the $2.8 billion of inflows to Japanese stocks, exchange data show.

“The won will do better than the yen in the next few months,” Perry Kojodjojo, a Hong Kong-based currency strategist at Deutsche Bank AG, said in a Sept. 1 phone interview. “The divergence of monetary policies in the U.S. and Japan should weaken the yen, while Korea enjoys a sizable current-account surplus and strong equity flows.”

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