South Korea central bank enlists its pension fund to defend weak won

South Korea central bank enlists its pension fund to defend weak won

SEOUL: Southern Korea’s central financial institution said on Friday (Sep 23) it had been setting up a currency exchange arrangement with the National Pension Service to divert some of the fund’s foreign currency needs, within a bid to put the floor under the rapidly weakening won.

The Bank of Korea and the NPS mentioned the US$10 billion currency swap offer will last through the finish of this year to allow the fund to reach the bank’s FX reserves.

Investors said if the NPS does this instead of sell won just for dollars in the onshore spot market, it will remove a big way to obtain dollar demand.

The arrangement might also complement the bank’s interventions in the currency markets to shoreline up the won.

“The NPS can secure funds necessary for overseas investment without counterparty risks, as well as the deal is also anticipated to stabilize currency market by easing the fund’s dollar demand from the spot FX market”, the BOK mentioned in a statement.

South Korea’s earned weakened to a lot more than 1, 400 for each dollar this week initially since 2009 : a 16 % decline for the 12 months. The won has been one of the hardest-hit emerging market currencies against a surging US dollar.

The particular won’s dive has spurred expectations for any faster pace appealing rate hikes from the BOK in this year’s two remaining plan rate reviews, scheduled for Oct 12 and Nov twenty-four, since policymakers would want to curb any further funds outflows. The BOK’s current policy rate is 2 . 50 per cent.

An aggressive Fed tightening has seen dollar-won yield differentials expand to 0. 75 per centage factors this week.

The NPS manages US$626. 6 billion, assets equivalent to about forty per cent of annual gross domestic item, and has been intense in investing abroad, with its operations weakening the won because it purchases billions of bucks.

“This could temporarily lift emotion for the won since it redirects the fund’s dollar buying push, but there seems to be no floor for that won’s fall on the moment”, a currency dealer said after the announcement.

The country’s widest-ever business deficit in the very first half of this year is also fanning bearish belief towards the won, each time when the Fed continues to tighten policy plus Europe’s energy turmoil fuel fears of a global slowdown.

The slump in the won has prompted the BOK as well as the finance ministry in order to push back hard lately, but their warnings failed to prevent the won’s slide to the 1, four hundred level.

“There seems to be no resistance level anymore, in contrast to when the won hovered around 1, 300 per dollar degree. Even smoothing functions won’t work if other currencies including european plummet like now”, a currency trader said.