South Korean Won: Undervaluation and BOK outlook aid won – BBH

FXStreet Insights Team FXStreet

Brown Brothers Harriman’s (BBH) Elias Haddad highlights an extended broad rally in South Korean Won (KRW) as Korean equities underperform, reducing rebalancing outflows. Haddad sees an encouraging outlook, with KRW about 11% undervalued on Real Effective Exchange Rates (REER) metrics and the Bank of Korea (BoK) poised to start hiking at its July 16 meeting. A new 24-hour onshore KRW market and a roadmap for won internationalization should bolster long-term demand.

Rebalancing, hikes and internationalization

"KRW broad rally extended, mirroring the underperformance in the KOSPI so far this month. The logic is that as Korean equities underperform and their weight in global portfolio declines, the need for foreign investors to trim positions and repatriate funds diminishes, reducing KRW outflows."

"By the same token, should the KOSPI regain leadership the rebalancing outflows are likely to re-emerge against KRW."

"Beyond rebalancing dynamics, the outlook for KRW is encouraging. The currency is significantly undervalued (11% undervalued based on deviation from real effective exchange rate trend), and the BoK is poised to start raising rates at its next July 16 meeting."

"Meanwhile, the South Korean government confirmed it will unveil its “roadmap for won internationalization” end-July. Monday’s launch of 24-hour onshore KRW trading marked the first major step."

"Over time, greater international use of 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.)

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