KRW/USD price forecast as the NPF buys more foreign bonds

The end of last week brought some interesting news from South Korea with the potential to heavily impact the local currency – the South Korean won (KRW).

More precisely, the National Pension Fund (NPF) announced that it will increase its allocation to foreign bonds to 60%. Such an explicit statement leaves no room for interpretation, meaning Korea wants a weaker currency.

To buy foreign bonds, one needs also to buy foreign currency to pay for those bonds, as most bonds are denominated in US dollars. Therefore, to do so, Korea must sell its local currency, increasing the pressure on the won. Even the Bank of Korea’s Governor admitted that the flow contributes to a weaker won.

The annual pace of the outflow is about 2% of the Gross Domestic Product, or about $10 billion a quarter or $40 billion a year. It is a clear example of how a state can intervene in the currency market without the central bank’s help.

So, what does it mean for the KRW?

KRW/USD to push for its 2009 lows

The KRW/USD exchange rate rallied at the end of 2022 as the dollar weakened. It was a generally weak dollar movement, seen in the stock market (which rallied too) and other major currency pairs, such as the EUR/USD or the AUD/USD.

But since it hit $0.0008, the KRW/USD rally faded. The danger now is that it slips back to the 2022 lows and, once taken, it will further drop to challenge the 2009 lows.

It is said that traders should not fight a central bank because the bank has limitless powers when it comes to issuing local currency. It is equally difficult to fight state outflows as the size of the indirect intervention to weaken the currency is too big to ignore.

Summing up, by buying foreign bonds, the NPF pressures the won. Expect all rallies to be sold aggressively.