Biggest Korea Brokerage Sees 10% Won Drop to Stave Off Deflation

  • Goldman Sachs also sees slide to 1,300 per dollar in 2016
  • Won weakened 6.2% this year in second straight annual loss

South Korea’s biggest brokerage predicts the won is headed for its steepest annual slide in eight years as the government favors depreciation to revive exports and stave off deflation.

Samsung Securities Co. forecasts the currency will sink as much as 10 percent in 2016 to 1,300 a dollar -- a level last seen in 2009 -- after a 6.2 percent loss this year that marks the worst annual performance since 2008. Goldman Sachs Group Inc. sees the exchange rate at 1,300 in a year’s time, while Morgan Stanley, Nomura Holdings Inc. and Societe Generale SA included bets against the won among their top trading ideas for the coming 12 months.

While all Asian currencies are expected to lose ground for the third year in a row against the greenback as U.S. monetary policy tightens, as of Nov. 30 only Indonesia’s rupiah was tipped to do worse than the won in 2016, Bloomberg surveys show. South Korea has already cut interest rates to unprecedented levels in order to keep the economy expanding as weakening Chinese demand batters exports and the Finance Ministry in June announced measures to encourage more capital outflows, including tax benefits for domestic funds buying overseas equities and looser regulations on foreign debt purchases.

“The authorities aim to boost inflation to raise nominal growth in 2016, but we don’t think the Bank of Korea will cut interest rates further,” said James Huh, an economist at Samsung Securities in Seoul. “What’s left is leading the won weaker via overseas investment to increase import prices.”

The Bank of Korea has set its new inflation target at 2 percent for the coming three years, down from a range of 2.5 percent to 3.5 percent for the 2013-2015 period that was never achieved. Consumer-price gains averaged 0.7 percent this year and last exceeded 2 percent in 2012. The monetary authority has pledged to end the current period of very low inflation that threatens to hurt the country’s economic growth.

National Pension Service, the nation’s biggest investor with more than $400 billion of assets, said this month it will stop hedging overseas bond investments against currency fluctuations by the end of 2018. The shift will add to depreciation pressure on the won as the government encourages Korean funds to invest more heavily abroad and the Federal Reserve raises U.S. interest rates, according to Goohoon Kwon, an economist and strategist at Goldman Sachs in Hong Kong.

"Our conviction remains strong on our bearish view on the won,” he said. "As the dollar is expected to strengthen against all major trading partners of Korea, including European Union, Japan and China, we think that a weaker won against the dollar is unavoidable."

China Risk

The won is also pressured by depreciation in the yuan, Samsung’s Huh said, as China’s economy expands at the weakest pace in more than two decades. The slowdown in the biggest export market for Korea is a risk, along with the Fed’s interest-rate increases, South Korean Finance Minister Choi Kyung Hwan said on Wednesday. Overseas sales will fall 11.7 percent in December, a 12th month of declines, according to the median forecast in a Bloomberg survey.

"We’re very focused on the possibility that the yuan’s drop may be faster than expected," said Huh. "That will drive all emerging-market currencies down, especially the won.”

Trade Recommendations

Morgan Stanley recommended in November selling the won versus its Japanese counterpart, citing South Korea’s strong trading links with China. Nomura advised clients to short the currency versus the greenback in a Dec. 7 report, while Societe Generale also suggested on Dec. 17 the same strategy using one-month non-deliverable forwards.

Samsung Securities and Goldman Sachs are among the more bearish forecasters for the won. The currency is expected to weaken 4 percent to 1,220 per dollar next year, based on the median estimate in a Bloomberg survey. It fell 0.2 percent to 1,171.60 as of 11:12 a.m. in Seoul on Wednesday, the last trading session of 2015.

"Selling the won will still be in play as higher U.S. rates erode the allure of emerging markets," said Daeil Suh, a Seoul-based economist at Daewoo Securities Co., South Korea’s second-biggest brokerage by market value. "Exports sluggishness will persist and be a significant downside risk to the economy."

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