Won as Asia’s Post-Brexit Best Pits Top Forecaster Against Crowd

Updated on
  • ING sees won extending gains as U.K. turmoil not material
  • Bank’s bullish view contrasts with market consenus for decline

Great risks, great rewards. That sums up the call for buying South Korea’s won from the most accurate forecaster for emerging Asia.

The currency has surged 3.8 percent since the week when the U.K. voted to leave the European Union. It will extend those gains even amid a sluggish domestic economy, says Tim Condon, head of Asia research in Singapore at ING Groep NV, which topped the most recent Bloomberg rankings for the won and its regional peers. That contrasts with the two next best forecasters, who see the won sliding more than 4 percent by year-end, and the consensus among strategists that it will be the worst performer in developing Asia.

“The won remains the most interesting currency in Asia for expressing risk -- when volatility spikes the Korean won underperforms, and when volatility goes back down it has more to retrace,” Condon said. Overall risk sentiment has improved since the U.K.’s Brexit vote, and a better economic outlook for China and the U.S. are both positive for the won, he said.

The won has been among the region’s top or bottom two performers every month this year except April, reflecting South Korea’s relatively open markets, active derivatives and a stock exchange that boasts multinationals such as Samsung Electronics Co. The nation has attracted a net $2.6 billion this month to its equities, set for the biggest inflows since March.

Stimulus Package

The currency’s 2.5 percent decline against the dollar on June 24, the day the U.K. referendum result was announced, was the worst among Asia’s 11 most-traded currencies. It has since gained as the government announced a stimulus package of more than 20 trillion won ($17.6 billion) to support growth. The won rose 0.4 percent to 1,136.13 per dollar in Seoul on Thursday after reaching 1,130.45 on July 15, the strongest in almost three months.

ING raised its year-end won prediction to 1,080 from 1,130, according to Condon. Wells Fargo & Co., the second-most accurate forecaster, says the currency will weaken to 1,190 by Dec. 31, while third-ranked Standard Chartered Plc projects a decline to 1,200, matching the median estimate of strategists surveyed by Bloomberg.

Most analysts expect the won’s recent rally to end as the country’s deteriorating economic outlook spurs bets the central bank will cut interest rates from the record low. There’s about a 60 percent chance policy makers will reduce the rate by another 25 basis points in the next six months, swaps data compiled by Bloomberg indicate.

BOK Outlook

Bank of Korea Governor Lee Ju Yeol, who surprised the markets with a reduction in June, kept the benchmark unchanged at 1.25 percent on July 14, saying last month’s reduction had taken into consideration the possibility of a Brexit.

“Our view is the Bank of Korea will cut the interest rate once more in the second half,” said Eddie Cheung, a currency strategist at Standard Chartered in Hong Kong. “So from that context, it does not justify a stronger won.”

Sentiment toward the currency may also worsen if there’s a renewed spike in volatility due to lingering Brexit concerns, Cheung said. Global factors, combined with subdued economic growth and inflation in Korea, mean the won should weaken, though the current-account surplus will limit declines, said Eric Viloria, a currency strategist at Wells Fargo in New York.

A gauge of global exchange-rate volatility has fallen since the result of the Brexit referendum was announced on June 24, and a measure of expected swings in the won over the next month has declined by the most in Asia in that period to 10.3 percent.

Export Growth

South Korea, which generates about half of its growth from exports, stands to benefit from an improvements in the Chinese and U.S. economies, the top destinations for its overseas shipments. Expansion in the nation’s gross domestic product slowed in the first quarter and overseas sales shrank for an 18th straight month in June.

The impact of Brexit will be concentrated in advanced European economies and the effect on other countries such as the U.S. and China will be muted, the International Monetary Fund said on Tuesday. The IMF raised its 2016 growth forecast for China, saying the nation’s near-term outlook has improved on recent stimulus measures, and reiterated a June estimate for U.S. expansion.

“A better outlook for China and people getting used to the U.S. growing slowly create a risk-on environment, and a risk-on environment is good for the Korean won,” ING’s Condon said. “Brexit is to be ignored. For Asia it’s not really that material.”