Barclays reports that foreign sales of Korean stocks have been a key driver of recent weakness in the Korean won, and its quantitative model suggests a clear relationship between equity outflows and currency moves. According to the bank, about every $10 billion in foreign equity withdrawals corresponds to roughly a 0.73% depreciation of the won against the dollar.
The USD/KRW exchange rate eased from levels near 1,560 after Korean authorities signalled tougher measures against speculative trading. Barclays also notes that authorities extended, for six months, a programme that pays interest on excess foreign exchange reserve deposits held by financial institutions - a step that provided additional support to the won.
In its assessment, Barclays identifies two recent headwinds for the won: rising energy prices and weakness in the Japanese yen. The bank also highlights that resident outflows have eased markedly, removing one factor that had weighed on the currency and leaving fewer domestic sources of selling pressure.
Barclays characterises the won as inexpensive on a real effective exchange rate basis and finds it similarly cheap according to its high-frequency model. The bank expects two institutional and regulatory dynamics to constrain further declines: anticipated dollar sales by the National Pension Service and the application of several regulatory measures designed to limit selloffs.
Looking ahead, Barclays anticipates that exporter dollar selling will accelerate in the second half of the year, with a pick-up expected from late July to mid-August as firms prepare to fund bonus payments, capital spending and corporate tax obligations. The bank cautions, however, that its outlook depends on the path of foreign equity flows.
Barclays flags a principal risk to its view: if foreign selling of Korean equities persists in the coming weeks as portfolio rebalancing continues, the pressure on the won could remain elevated. The bank's analysis ties currency moves directly to equity flows and a narrow set of policy and institutional behaviours that could either limit or amplify market-driven moves.
What this means
- FX markets are sensitive to foreign equity flows and policy responses in Korea.
- Exporters, financial institutions and pension funds are among the market participants implicated in the near-term outlook for the won.