JPMorgan Sees Won Rising to Pre-Lehman Levels on Surplus

By Jiyeun Lee and Kyung-Jin Kim  

South Korea’s record current-account surplus will boost the won to levels prior to the 2008 global credit crisis, JPMorgan Chase & Co.’s Seoul branch manager said.
The won will climb past 1,000 per dollar as local equities attract inflows, Managing Director Lee Sung Hee said in an Aug. 14 interview, without specifying a timeframe. The U.S. bank’s Singapore-based strategist Daniel Hui predicts a 1.8 percent gain to 1,000 by end-December. The median estimate in a Bloomberg survey of 31 analysts is for a 0.7 percent decline to 1,025 in the same period.
The currency has advanced 3.1 percent this year as global funds pumped $27.7 billion into South Korean bonds and stocks. The central bank last month raised its 2014 forecast for the current-account excess to an unprecedented $84 billion from $68 billion. The Bank of Korea’s decision last week to lower borrowing costs in support of the government’s efforts to
revive economic growth won’t deter capital inflows, Lee said.
“It would be difficult for the won to weaken given a current-account surplus of this size,” Lee, who is also JPMorgan’s head of global emerging markets in Korea, said in his office in Seoul. “Gains in the stock market will spur inflows, adding appreciation pressure on the won.”
The won rose 0.3 percent from Aug. 14 to 1,017.75 per dollar as of 12:19 p.m. in Seoul, according to prices from local banks. Korean financial markets were closed for a public holiday on Aug. 15. The currency rallied 0.8 percent on Aug. 14, the most since April, as the central bank cut its key interest rate.

Currency Forecasts

The nation’s currency last traded at 1,000 per dollar in July 2008, before Lehman Brothers Holdings Inc. filed for bankruptcy, triggering a crisis in global credit markets.
Hui, the JPMorgan strategist, predicts that after reaching 1,000 by September, the won will remain at that level through the end of 2014 before climbing to 995 by March and to 985 in June. The median forecasts in the Bloomberg survey are for the currency to reach 1,020 in the first quarter of 2015 and 1,017 in the second.
South Korea’s finance ministry unveiled a 11.7 trillion won ($11.5 billion) spending program on July 24 after cutting its 2014 growth forecast to 3.7 percent from 3.9 percent. The ministry plans to encourage companies to boost dividend payouts.
“One of the government’s policy goals is to raise the wealth effect by boosting prices of asset such as equities,” JPMorgan’s Lee said.
The benchmark Kospi (KOSPI) index of shares gained 2.7 percent this quarter, more than the 1.5 percent increase in the MSCI Asia Pacific Index of regional equities.

Stimulus Measures

The central bank reduced its key interest rate from 2.5 percent to 2.25 percent on Aug. 14, the first cut since May 2013. The move will help boost the effectiveness of the government’s stimulus, Governor Lee Ju Yeol said the same day.
The fiscal spending package, along with the central bank’s policy easing, will encourage foreign inflows by supporting growth and boosting equities, Morgan Stanley strategists including Geoffrey Kendrick in Hong Kong wrote in an Aug. 14 report.
Lower borrowing costs won’t discourage overseas bond investors as central banks and sovereign wealth funds tend to focus on long-term economic fundamentals, according to the report. Global central banks accounted for 42 percent of foreign investment in South Korean bonds as of end-2013, data from the finance ministry show.

Volatility Seen

While the won will appreciate over the long term, the currency may face increased volatility due to geopolitical tension in Ukraine and slower economic growth in Europe, according to JPMorgan’s Lee.
One-month implied volatility in the won, a gauge of expected swings in the exchange rate used to price options, has risen 125 basis points, or 1.25 percentage points, this quarter to 5.90 percent today.
“A certain amount of foreign-exchange volatility can be beneficial to traders and companies,” Lee said. “Too little volatility tends to lead to overreactions by investors if the exchange rate moves beyond a certain range.”