Won predicted to lead regional currency slide

Asia’s most-accurate forecaster predicts Korea’s won will lead a retreat in regional currencies this quarter as record-low yields drive outflows.

Australia & New Zealand Banking Group, which topped Bloomberg’s emerging-Asia rankings in the last quarter, says both residents and foreigners will take money out. Second-placed ABN Amro Bank NV also estimates the won will fare worst as overseas sales are hurt by weakness in the currencies of rival exporters. Both see the Chinese yuan with the second-biggest decline.

The won and Taiwan’s dollar are the most vulnerable after China’s Aug. 11 devaluation as their exporters have the highest exposure to Asia’s biggest economy. The National Pension Service, Korea’s biggest investor, may pump as much as $30 billion yearly into overseas assets to chase better returns, according to a Barclays Plc report dated Oct. 2.

“Because of low interest rates in Korea we are seeing Koreans taking their money offshore to generate higher returns,” said Khoon Goh, a senior currency strategist at ANZ in Singapore. “Also foreign direct investment flows are negative. All those have been outweighing the current-account surplus.”

Both ANZ and ABN Amro estimate the won will lose 4.4 percent from Sept. 30 to end the year at 1,240 per dollar. Third-ranked Macquarie Bank Ltd. sees a 2.8 percent decline to 1,220. The yuan will weaken 2.9 percent to 6.55 versus the greenback by the end of December, according to ANZ and ABN Amro, while Macquarie predicts a 2.2 percent drop to 6.50.

The yuan’s decline will be relatively small as Chinese authorities, armed with the world’s largest foreign reserves, ensure an “orderly” depreciation, according to Goh.

The won retreated 5.9 percent last quarter and has weakened 7.4 percent in a year. ANZ estimates overseas portfolio investments by Korean residents jumped by $41.4 billion in the 12 months to August compared with a $38 billion increase a year earlier. That’s on top of a net $21.8 billion of foreign direct investment that left the country compared with $19.3 billion of withdrawals a year earlier. Global funds pulled a net $725 million from Korean equities in the last 12 months, exchange data show.

Korea’s bonds are losing their appeal as yields drop below Treasuries. The 10-year sovereign yield sank to a record 2.04 percent this week, two basis points less than on comparable benchmark U.S. debt, data compiled by Bloomberg show. The discount compares with a premium of as much as 74 basis points in January.

Local bonds rallied as the weakest economic growth in more than two years and low inflation prompted the Bank of Korea to cut its benchmark interest rate to an unprecedented 1.5 percent in June. Korean authorities have signaled they favor a weaker currency as exports contracted in each of the first nine months of this year amid a slowdown in China, the country’s biggest overseas market.

In June, the finance ministry announced measures including tax benefits for funds buying global equities and eased rules for currency hedging and foreign debt purchases by insurers, saying the current-account surplus is deepening imbalances in the foreign-exchange market. The excess in the broadest measure of trade increased to $70.1 billion in the first eight months of 2015 from $54.5 billion a year earlier, Bank of Korea data show.

“They don’t want a strong currency,” said Roy Teo, ABN Amro’s senior currency strategist in Singapore. “The BOK is also likely to tolerate weakness in the won to support exports and the inflation outlook.”

Teo said that while chances of the Federal Reserve raising borrowing costs this year are receding, further monetary easing in Japan and Europe could impact the won as weakness in the yen and euro will hurt global demand for Korean goods. Bloomberg