Wells Fargo Sees Won Rally Reversal on Fed Tightening Prospects

Updated on
  • Won susceptible to equity decline, U.S. rate hikes: strategist
  • South Korea's yield advantage over Treasuries has disappeared

The won’s biggest monthly rally since 2011 is susceptible to a correction, with the U.S. set to resume raising interest rates as inflows to South Korea weaken, according to Wells Fargo & Co.

While the currency has gained 6 percent in March and monthly stock inflows are the highest in 11 months, the longer-term picture looks less rosy. Over the past 12 months, $5.4 billion has flowed out of South Korean equities and the nation’s 10-year government bonds now yield less than U.S. Treasuries. Wells Fargo is projecting an exchange rate of 1,180 a dollar in a year, compared with the 1,166.25 close on Thursday.

Weaker inflows suggest "the Korean won remains somewhat susceptible to renewed Fed tightening or Korean equity market disappointment," Nick Bennenbroek, head of currency strategy at Wells Fargo in New York, wrote in a report on Wednesday. "We expect at least a partial reversal on the won’s recent strength over the medium term."

The currency fell 0.4 percent, adding to Wednesday’s 0.6 percent decline, according to data compiled by Bloomberg. It’s retreated 1 percent from a three-month high of 1,153.91 reached on Tuesday, but the won’s monthly performance is still the best since October 2011 and tops gains in Asia.

South Korea is grappling with a 14-month slump in exports and a contraction in manufacturing. Unless there’s “perceptible firming” in economic growth, equity disappointment remains a downside risk to the won, according to Wells Fargo. Still, the U.S. bank said the large current-account surplus, which is estimated by the Bank of Korea at $98 billion this year, will limit the currency declines.

Ten-year sovereign bonds rose, pushing the yield down four basis points to 1.85 percent, Korea Exchange prices show. That’s three basis points less than similar-maturity Treasuries, compared with a premium of as much as 74 basis points in January last year, according to data compiled by Bloomberg.