After venturing into 1,050’s won per dollar territory, the Bank of Korea (”BOK”) has announced they have dipped into at least $2 billion of their currency reserves to prop-up the won in foreign exchange (”forex”) markets. The main catalyst for this action are rising commodity prices contributing to higher rates of inflation. Inflation is at 4.9% compared to 4.1% a year ago. Korea’s foreign currency reserves have declined $2.28 billion to $258.2 billion by the end of May from $260.5 billion a month before. The won has now stabilized to the 1,020’s per dollar.
The BOK has sent a clear message to the markets (i.e. the George Soros’ of the world) they will mount a vigorous defense of the won in light of market pressures to lower its value. However, using your foreign currency reserves can be a tricky proposition, especially if a country has signficant short term loans. Foreign currency reserves serve a dual purpose in not just defending a currency but in also in demonstrating, to international finance markets, that short term loans can be immediately paid off if called-up early. At the end of 2007, Korea’s short-terms loans stood at a whopping $158.7 billion, which would be 61% of your foreign currency reserves. Although Korea’s foreign currency reserves stand at $258 billion (sixth largest in the world Koreans will proudly tell you), their reserves net of short term debt is only $99.5 billion. That is their real dry powder to work with in propping up the won. Nothing to be concerned about yet, but stay tuned.
High commodity prices and high inflation rates are positively linked. Since commodities are traded in dollars, the BOK is not going to let the won fall too much against the dollar as long as commodity prices are high. As I’ve said earlier here, it appears as long as oil and food are expensive, the BOK is going to do what it can to keep the won from dipping too much too quickly.
Speaking of oil prices and George Soros, he’s appearing before Congress to testify that there may be an oil bubble after all.
35 Comments
I don’t get it. Wasn’t someone writing here just a couple of months ago that the Korean won was undervalued, that it should be in the 800 won/US dollar region?
i dont get it either, they wanted to float the won down to stimulate exports, which was nuts given the inflationary pressures at home now they are DEFENDING the won? like someguy said, the value should be around 900/dollar.
they are now getting nailed on the short term debt because they are having to sell dollars to pay for oil since if they printed more won that would cause even more inflation. thats the only reason i can come up with
# 1,
Wasn’t me. I said that it could be 1,200 won to a dollar and that a barrel of oil could be $80 by year’s end.
http://www.rjkoehler.com/2008/.....ent-152837
# 2,
Floating the won lower seemed like a good idea late last year when Hyundai was crying uncle in early 2007 and late 2006 when it hit 930 to a dollar. However, commodity prices rose too high and too fast so the BOK put the brakes on letting the won decline. There is a happy median. Commodity prices heavily affect what that happy median is. The BOK has decided that it’s not 930 and it’s not 1050. It will continue to move as commodity prices move.
But you know, all this is not important at all. We have the US beef problem, which is much much more important to Koreans.
# 4,
Riiiiiiight.
You don’t see candle light vigils over bad monetary policy…
MADE IN USA
Oops, wrong thread
I think I’m going to go and protest this rise of the Won in front of Seoul City Hall. This is blaspehmy I tell you! Damn Koreans are conspiring against us! Bring your candles everyone! …don’t forget to bring the Korean flags that we will burn to make our point as well!
I also think there’s an inflation angle. Korea just announced its highest inflation rate in 7 years. As enemy no. 1 of central banks, inflation is usually fought with higher interest rates. But that would slow domestic growth and raise the borrowing expenses of the chaebol.
Since a pretty good chunk of Korea’s inflation comes from imported energy and other USD-denomintated commodities, the government can unload some its USD reserves, strenthen the won, and make its imports cheaper. Net effect, if I’m right about their thinking, is to fight inflation for the average Korean consumer without raising interest rates and thereby impeding economic growth.
My thinking is that it won’t work, but I have to admit I’ve been on the wrong side of the KRW/USD rate many times before…
Rather than allow Market forces do their bit the BOK always has to try to manipulate markets.
The Japanese are also being hurt by rising commodity prices. The big difference is the Japanese use resources very frugually, micro cars, bicycles, whereas Korea is very wasteful.
Fundamentally what we have in Korea is a very badly managed economy, that is full of inefficiences caused by government interference and Nationalistic policies.
Korea is in trouble because while the high oil prices have not helped, international and domestic investments have stalled and shrunk due to xenophobic policies and practices from top man down, that have driven away investors. Nobody is crazy enough to invest in Korea and that’s the problem. The country is too busy tackling such petty issues like Dokto, US beef, English teachers, etc etc, to take any notice.
“Fundamentally what we have in Korea is a very badly managed economy”
Don’t be so hard on Korea. Could be worse. Korea could be managed like any number of Latin American, Southeast Asian or Eastern European countries.
$63 per capita to $24k today? It’s still got it’s problems, but it’s done okay overall.
What Koreans have today, they are living off their parent’s generation. There hasn’t been any kind of real income growth for close to 20 years. Yet, anyone who tries to rock he boat and do something different for a change, is shot down over fear mongering over beef, even before he had a chance to do anything.
Exactly! The economy HAS done ok. Note the past tense. Since 97 its been stuck in a rut.
To get moving again requires massive restructuring. However that is not going to happen so instead Korea is suffering a slow death.
The only bright spots are innovations such as the new hard drives.
This place has a lot of potential. It’s a pity to see the average Kim shafted because of poor leadership.
I would love to see the Won go back to W1900. Some of you may remember. The IMF bailed out Korea in the past amd I doubt a bailout would happen again. Korea had too many debts negated back then by the USA easpecially.
I think the first part of Linkd’s comment sounds right.
If oil falls and the dollar rises, the won should strengthen overall, though not necessarily against the USD. That’s to say, I think the won will rise with the dollar, but it’s very hard to say which will rise faster.
Therefore if you wanted to trade this it could be better to go long won against another currency. If you really want to play a short oil direction you could go against a commodity currency like the Canadian dollar. Otherwise long won against the euro or yen. Or maybe buy Korean stocks? I wonder what Linkd thinks about that.
I don’t know if the intervention will work or not.
I personally would just stay away. The recent won strength hasn’t been enough to break the won weakness on the charts, so it’s still too early to make a judgment on direction imo.
That said, oil make a technically important break to the downside today, though the market hasn’t closed yet… My only fear is that shorting oil seems so obvious and everyone’s talking about it.
I just mentioned oil making a break in its downtrend. After looking at the charts I think I was wrong (as of 1:15 EST). I should have said that it’s right at the lower trendline, poised to break the trend.
Also, if oil really falls I bet the BoK will cease intervention. My guess has been that they’re happy with 1000 USD/KRW (not that they have total control by any means).
Linkd,
It’s true that inflation is the great wild card here. Although commodity prices don’t equal CPI per say, it directly contributes to it.
Here is why Korea’s current monetary policy may work and has worked to some extent.
The weak won has raised demand for Korean products overseas and decreased Korean demand for foreign goods so the CAB has swung back to the positive in May.
The economy has grown faster then projected due to the weak won.
The market is starting to think that oil has plateaued and will steadily creep down.
The U.S. Fed has made a committment to start strengthening the dollar, which in the short term will make the won weaker, but will stabilize commodity prices.
So, allowing the won to be weaker up to a certain point is the best strategy for the BOK for the time being. The one thing that can f-this up are commodity prices, but I think they will stabilize and creep down.
WangKon, wouldn’t your points above suggest that Korean equities should be a better play than the currency alone?
Perhaps. Depends on the equity.
You can always short currency also.
I think if oil breaks down further and the US dollar index climbs more I’d call a long on the KOSPI 200. If oil regains I’d stay away. We’re at the bottom of a longer term uptrend in the KOSPI. Maybe Warren Buffett was right.
I wonder how much effect a weakened LMB administration might have on SK stocks.
Hey day4night,
I feel it necessary to repeat my disclaimer that I first gave here:
http://www.rjkoehler.com/2008/.....ent-142415
Thanks WangKon. Actually I’m a licensed futures & FX trader and have run my own small shop. I took some months off after a few really bad trades that almost completely wiped out my clients’ previous gains, but I’m preparing to go back in. I’ve never traded anything related to Korea but find the KOSPI could be great for a short term volatility breakout strategy because of the liquidity and volatility, and also maybe — what we’re talking about here — as a longer position trade if the larger macro environment permits. CTA’s in the US can now trade KOSPI futures.
Do you trade?
Well, most of my money goes into real estate because it will never drop to zero in value and you can live in it whereas stocks and commodities have no use unless you sell ‘em.
Funny, I spent the last three years pleading with friends not to buy houses because of all the bad loans and the liquidity bubble. My naive rule now about housing, at least in the US and Europe, would be to not catch a falling knife but instead to refrain from buying until house prices fall below their longer term relationship to household incomes. But it’s hard to argue with needing a place to live… And I know nothing about local real estate markets.
About the KOSPI, I’d also want to see an improved picture on the charts before going long as an investment trade. The technicals are still too ugly for me I think. But I might like Korea’s fundamentals if oil gets hammered.
I’ll add my own disclaimer to conform with all possible regulations:
These comments are for entertainment and personal inquiry only. They are not ina any way trading recommendations. The future’s uncertain, the markets risky, I don’t know what will happen but even if I were “right” you could still lose money, especially if you didn’t manage risk properly. (Not that I believe anyone would trade based on what I say here. I hope not.)
However, I’ve always wanted to dabble in commodity futures trading. It’s such a pattern based on seasonality that it’s tempting. But, I really do have to be mentally prepared to loose at least $10k without any return/protection. Not there yet. Maybe early next year.
You’re in finance, right? Maybe you could do it. I had to lose a whole lot (of other people’s money, as a broker) before I learned to trade decently. I’d say don’t use a personal futures broker or sales trader (though a managed futures account could be good as a small part of a larger portfolio), study study study, focus on not losing money or else placing small purchased options trades where your risk is limited to the premium paid, and start very small. You’d also want to discover what trading styles suit your personality. Discipline and excellent risk management become of primary importance. The winners in the futures markets constantly feed on the capital of the uninitiated, and it’s more of a zero-sum game than stocks. You probably know all of this, but it’s what I pretty much tell anyone who shows interest in commodities. I personally don’t like physical commodity index funds because I think they’re unethical (as opposed to futures), unless you’re shorting them!
Interactive Brokers is one of my favorite online brokers, and in case if you have dealings with Korea they provide multi-currency accounts and an extremely cheap means of currency conversion compared to the banks, credit cards and other FX conversion rip-off artists.
Hope I don’t come off as a know-it-all btw. What I know is the pain and stress of losing in the futures markets!
I remember having an argument with someone about a year ago that Korea is pretty much riding a wave of handouts from the international community, the US namely (they’ve got a half-free army, a shipping industry, a clothing industry from the 80’s). It’s all really tenous.
“reserves net of short term debt is only $99.5 billion”
That is higher than the total reserves of the United States at something like 75 billion USD
“reserves net of short term debt is only $99.5 billion”
That is higher than the total reserves of the United States which is something like 75 billion USD
# 29,
The 80’s were a long time ago and lots of countries get hand outs not just Korea. Japan gets a hand out through the Yoshida Doctrine. The U.S. gets a monetary hand out by establishing the Bretton Woods system and Saudi Arabia sits on a shit load of oil…
# 31,
The U.S. doesn’t need as big foreign currency reserves because it’s an extremely developed country and it had highly advanced financial markets.
Korea’s economy is recently developed yes, but they have comparatively primitive financial markets vs. the U.S. or Europe.
#33
“highly advanced financial markets..”
as in the US could just print dollars at will?
ha ha #34.
I guess Wangkon is unaware that the IMF has launched an investigation into the “highly advanced” US financial system.
The US dollar moved from the gold standard to the gun (or nuke) standard back in the 70s.
Military power has been the underlying base for all economies since Ggugh and Euragh first dragged a mammoth back to the cave and told Gharaeugh to stand guard out the front.
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