Pacific Money

South Korea’s Currency Shows Strength

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Pacific Money

South Korea’s Currency Shows Strength

With many Asian economies under growing pressure, South Korea looks robust, if the won is any guide.

The ripple effects and knock-on effects of Washington’s recent dysfunction continue to flow out across the world. Damage wrought by the shutdown and debt ceiling brinkmanship have had a significant impact on the U.S. economy, although it is still not clear just how significant. Hence, fears of the Fed’s taper are now very much put on hold, even with both Ben Bernanke and Janet Yellen both seeming to be in favour of reducing the quantitative easing program. 

The withdrawal of funds from emerging markets, a feature of the taper-fearing global financial landscape that persisted until the Fed’s recent surprise delay, has thus gone into reverse. Not surprisingly, funds are not simply returning to whence they came, but trying to pick the places that seemed less naked during the recent volatility.

One such destination seems to be the South Korean won, a currency that has seen its value measured in U.S. dollars jump over the past few months. In fact, on Thursday the won briefly hit a two-year high in intraday trading, a level that quickly prompted the Bank of Korea and the finance ministry to warn they would take action to limit excessive valuations if they felt it necessary.

Sometimes just a threat of intervention can help to quell a currency, and indeed the won fell back after the announcement. However, South Korea’s relatively strong performance means that the justification for buying the country’s equities and bonds remains a big pull factor for funds seeking a blend of security and better yields.

South Korea has just reported forecast-beating GDP growth of 3.3 percent year on year for the third quarter. The 1.1 percent growth over the previous quarter is also a positive sign, and one that suggests the good performance should continue. An accompanying current account surplus provides the icing on the stability cake, which is proving so attractive to overseas investors.

As usual there are a few potential clouds on the horizon, even if they are much smaller than those hovering over Jakarta and New Delhi. For one thing, the won’s strength is a big problem for Korea’s export sector, competing as it is with a weak dollar and, more importantly, a weakened Japanese yen (itself a product of Abenomics). In fact, the won’s strength was at least partly to blame for some of the bad news out of Seoul on Thursday: third quarter export numbers showed a 0.9 percent fall from the April to June period.

Regional uncertainty, global uncertainty and China uncertainty all interplay to give further pause when considering economic prospects in South Korea. The latter should be at least partially assuaged in November during Beijing’s Third Plenum meeting, but other issues in China, and indeed the global economy look set to drag on well into 2014.

Despite these reservations, South Korea remains a better prospect than many places right now.  Troublesome though it is, the strength of the won is a clear signal of this fact.