Elias Haddad of Brown Brothers Harriman (BBH) highlighted an extended broad rally in the South Korean won (KRW) as Korean equities underperformed, reducing rebalancing outflows. Haddad sees an encouraging outlook, with the KRW about 11% undervalued on real effective exchange rate (REER) metrics and the Bank of Korea (BoK) set to initiate hikes at its July 16 meeting. A new 24-hour onshore KRW market and a roadmap for internationalization should boost long-term demand.
Rebalancing, footfall and internationalization
“The KRW’s broad rally extended, reflecting the poor performance in the KOSPI so far this month. The logic is that as Korean equities underperform and their weighting in global portfolios declines, there is less need for foreign investors to reduce positions and repatriate funds, thereby reducing KRW outflows.”
“Similarly, if KOSPI should regain leadership, rebalancing outflows against KRW are likely to re-emerge.”
“Beyond the rebalancing dynamics, the outlook for the KRW is encouraging. The currency is significantly undervalued (11% undervalued based on deviations from the real effective exchange rate trend), and the BOK is set to start raising rates at its next July 16 meeting.”
“Meanwhile, the South Korean government confirmed it will unveil its “roadmap for internationalization” in late July. The launch of 24-hour onshore KRW trading on Monday marked the first major step.
“Over time, greater international use of the KRW should increase underlying demand for the currency.”
(This article was created with the help of an artificial intelligence tool and reviewed by an editor. know more.)
