Won Rises to Highest Since January on Inflows; Bonds Advance
Comment of the Day

September 23 2013

Commentary by Eoin Treacy

Won Rises to Highest Since January on Inflows; Bonds Advance

This article by Yewon Kang for Bloomberg may be of interest to subscribers. Here is a section
After the Fed's surprise, we expect foreign investors to keep buying South Korean shares,” said Jeon Seung Ji, a currency analyst at Samsung Futures Inc. in Seoul. “As the won is expected to strengthen further, traders are wary of possible intervention by authorities to slow the pace of its gains.”

The won advanced 0.9 percent from Sept. 17 to 1,074.15 per dollar in onshore trading in Seoul, according to data compiled by Bloomberg. It touched 1,074.13, the strongest level since Jan. 25. Local markets were shut Sept. 18-20 for public holidays. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, rose eight basis points, or 0.08 percentage point, from Sept. 20 to 6.74 percent.

Eoin Treacy's view The vast majority of Asian currencies surged on the news that the Fed had decided to delay tapering of its quantitative easing program. Short-term bought conditions are now evident on a number and previous areas of resistance are being tested. The comments from James Bullard that the tapering may go ahead as early as next month have caused investors to reassess again with the net effect that uncertainty has risen.

The Korean won is notable because South Korea does not have the same current account deficit issues as either India or Indonesia. As a result it has been less volatile. The US Dollar has been ranging with a mild downward bias against the Won since 2010 with the most recent lower peak posted near KRW1150 in June. It is oversold in the short-term, and in the current environment of competitive devaluation the prospect of significant additional Won strength appears unlikely. Therefore the most likely medium-term scenario is for additional US Dollar ranging, with an overall downward bias, with some short-term scope for a relief rally to unwind the oversold condition.

Against this background the Kospi Index is retesting the upper side of a 30-month range but will need to sustain a move above 2170 to confirm a return to medium-term demand dominance. Both Samsung Electronics and Hyundai Motor, South Korea's two largest companies, have London listed GDRs.

Samsung Electronics experienced a sharp decline below the 200-day MA in June and rebounded equally sharply in September. Some consolidation of recent gains now appears likely and the share will need to find support above or in the region of $600 if the medium-term uptrend is to be given the benefit of the doubt.

Hyundai Motor broke out of a two-year range in May and has since posted two equally sized reactions, one above another. A pullback of more than $5 would represent a larger reaction, would dip into the underlying range and suggest at least a process of consolidation is underway

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