The South Korean won (KRW) has shed 16.5% against the US dollar (USD) since the start of the year, with more than 6% of that depreciation coming in September alone.
The won is currently (20 October) trading at its lowest level against the dollar since March 2009, as a strong US dollar and concerns about the impact of a global recession on South Korea’s export-driven economy weigh on the relative value of the currency.
The won has been the second worst performing currency in Asia this year, behind the Japanese yen (JPY). As a proxy for global risk, the cyclical currency has had the strongest response among Asian currencies to the volatile global macroeconomic environment.
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The South Korean currency has been more volatile against the euro, which is facing its own headwinds from geopolitical tensions and an ongoing energy crisis.
Will the won find support from more hawkish interest rate policy from the Bank of Korea (BoK), or will it continue to weaken?
In this article, we look at the key drivers for the South Korean won and the latest forecasts from foreign exchange analysts.
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Persistent trade surpluses in South Korea and deficits in the US kept the USD/KRW exchange rate relatively range bound for a decade from 2010.But the country is on track to record its first annual deficit since the 2008 financial crisis, with imports surging on higher global energy prices.
The trade deficit reached a record high of $9.47bn in August, with crude oil accounting for more than 50% of imports. The deficit was $3.7bn in September, higher than analysts’ consensus estimates of $3.45bn and the sixth consecutive month of trade gaps. That was the longest stretch of deficits since the 1997 Asian financial crisis.
The Bank of Korea raised its headline interest rate by 50 basis points (bps) to 3% on 12 October, its second-ever hike of that size, following its first 50bp hike in July. The BoK had said at that time it expected to return to 25bp hikes, but said last week:
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“The Board judges that the policy response should be strengthened, as additional inflationary pressures and the risks to the foreign exchange sector have increased affected by the rising Korean won to US dollar exchange rate, while inflation has remained high.”
“Despite sticky high inflation due to external factors, the risk of domestic financial instability associated with monetary tightening is much higher in Korea than in the US. A higher interest rates driven by the BoK hikes tend to take a larger toll of biting out consumption power and weakening the property market at a precarious pace. Policy rate inversion between Korea and the US will likely deepen from here.”
The BoK expected consumer price inflation to remain high around 5-6% range “for a considerable time” as the rising dollar acts as additional inflationary pressure, and it anticipates further rate hikes ahead.
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Analysts at Dutch bank ING expected the central bank to raise rates by 25bp in November, with the potential for another 25-point hike early next year.
What is the KRW forecast heading towards the end of the year and into 2023? We look at some analysts’ projections below.
“A further sharp rise in USD/KRW could prompt the BoK to raise the policy rate even more quickly than the US Fed. However, the probability of a faster BoK hike vs the US Fed is quite limited, in our view, ” according to its latest KRW prediction.
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“Weakness in the Korean won can be mainly attributed to a broad USD strength. There is no strong anecdotal evidence that policy rate differential alone can override global USD bullish factors. Instead, a faster BoK rate hike pace irrelevant of local economic fundamentals could be detrimental to the Korean won.”
Forex analysts’ forecasts indicated that the USD/KRW rate could peak at the end of this year and then weaken in 2023 as the won regains some ground.
ING’s analysts noted their “FX view remains unchanged: the fallout of China’s economic woes and a strong dollar should continue to put upside pressure on USD/KRW, and [they] forecast 1, 500 by year-end.”
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The bank’s longer-term KRW forecast saw the won strengthening next year, with the pair moving down to 1, 450 by the end of the first quarter and 1, 250 by the end of 2023, remaining around that level in 2024.
Malaysian bank Maybank revised up its USD/KRW forecast, predicting that the rate could end the year at 1, 450, from a previous forecast of 1, 320. It then expected the pair to soften to 1, 420 in the first quarter of 2023, from a previous forecast of 1, 300, trade at 1, 370 in the second quarter, up from 1, 270, and slide further to 1, 320 in the third quarter.
“We expect KRW to remain under pressure in the near-term amid accelerating global growth concerns, tighter financial conditions (as central banks prioritise dampening inflation at the expense of growth). KRW’s high-beta to global chip demand and global equity performance likely implies that sentiments drags could remain intact near-term, particularly with Europe and regional geopolitical tensions still in play, ” Maybank’s analysts wrote in their monthly South Korean won forecast.
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“Declining foreign reserves is also a cause of concern. USDKRW could hence remain in buoyant ranges in 4Q 2022 and early 2023. But signs of moderation on domestic Covid infection pace, still-hawkish BoK, slowing up-moves in UST yields, softer oil prices vs. 1H, more clarity on global growth momentum etc., could imply some chance for USDKRW to head lower from 2Q 2023.
“BoK is reportedly monitoring offshore speculative drivers more closely, and could continue with actual intervention moves to avoid sharper KRW losses. We also note comments from Vice FM on potential measures to counter ‘herd behaviour’ in markets.”
In its technical USD/KRW outlook, the bank noted that bullish momentum showed signs of moderating while the relative strength index was overbought. There was bearish divergence on the moving average convergence divergence (MACD).
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The pace of the pair’s rise could slow and there were modest retracement risks. There was support at the 21-day moving average at 1, 394 and the 50-day moving average at 1, 349, with resistance at 1, 450 and 1, 480.
Japanese bank MUFG’s South Korean won forecast for 2022 also expected the won to weaken further by the end of the year and then begin rebounding in 2023, noting:
“The KRW likely remains largely driven by external drivers near term. Given a persisting US dollar strength and global growth concern, particularly recessions in UK, Europe and US, we see the pro-cyclical KRW to remain under-perform relative to EM Asian currencies. Also, with a possible worsening of current account balance caused by deteriorating exports amid a softening semiconductor industry and weakening global demand, we see USD/KRW to move up to 1470 by the end of Q4 this year.”
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The EUR/KRW pair soared from 1, 312 in mid-July to breach the 1, 400 level at the end of September for the first time since September 2020. The South Korean won forecast from Trading Economics indicates that the pair could stabilise, trading at 1, 399.35 by the end of this quarter and at 1, 396.80 in one year, according to its global macro model projections and analysts’ expectations.
For the long term, the euro to South Korean won forecast for 2025 from algorithm-based forecaster Wallet Investor at the time of writing (20 October) projected that the pair could end the year at 1, 424.331, up from 1, 394.082 at the end of 2023.
Note that analysts’ predictions can be wrong. Forecasts shouldn’t be used as a substitute for your own research. Always conduct your own due diligence before trading. And never invest or trade money you cannot afford to lose.
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Analysts expected the KRW to weaken further in the fourth quarter, as the US dollar remains strong on hawkish Federal Reserve policy on interest rates.
The long-term direction of the South Korean won could depend on the Bank of Korea’s policy on interest rate and intervention in the foreign currency market, as well as US monetary policy and global demand for South Korean exports such as semiconductors.
Whether it is a good time to buy the KRW for your portfolio will depend on your risk tolerance and investing strategy. You should do your own research to decide whether to trade the currency. Remember to never invest more money than you can afford to lose.
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