KRW: Tech cycle and NPS hedging shift back bullish case – MUFG

MUFG’s Senior Currency Analyst Michael Wan argues that KRW could outperform in a de-escalation scenario despite vulnerability to prolonged conflict and higher Oil prices. The bank expects the strong AI and technology cycle to continue supporting South Korea. A major shift in NPS FX hedging policy, moving a 15% cap to a baseline, is seen as structurally important for KRW over time.

KRW backed by tech and policy change

"In South Korea’s case, while it’s definitely hurt in a scenario of prolonged conflict and higher oil prices, our base case forecasts in a de-escalation scenario has KRW outperforming to some extent in part due to our expectation for the strong AI and tech cycle to continue notwithstanding risks from oil prices and energy supplies."

"Beyond the fundamentals, South Korea’s NPS is scrapping a long-standing 15% cap on forex hedging, aiming for greater flexibility during periods of market volatility, according to a statement released yesterday."

"This 15% level will instead serve as a baseline ratio, with FX hedging now viewed as a core policy in overseas investment rather than applied only in exceptional circumstances. This is a very key change in NPS FX strategy, and with implications not just for the near-term but also potentially over the medium-term."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)