Won Eyes Key Level on BOK Policy Decision, Bond Inflow Tailwinds

(Bloomberg) -- The Korean won is poised to strengthen toward a key level, supported by ongoing bond inflows and expectations the central bank will refrain from cutting interest rates next week. 

The Asian currency has gained 4.9% this quarter against the dollar, nearing the psychological level of 1,300 per greenback. Some analysts forecast the won to reach that level by the end of the year with the currency closing 0.6% stronger at 1,309.6 on Friday.

Increased buying of South Korean debt by foreigners has boosted the won amid an upcoming decision to include the nation’s bonds in a key FTSE Russell index. Even as economists forecast inflation to slow this week, leaving the door open for the Bank of Korea to cut rates on Oct. 11, Governor Rhee Chang-yong has signaled that worries over financial stability may keep rates on hold for longer.

“We may see some talk of monetary easing in the upcoming meeting, but not an actual rate cut,” said Shaun Lim, a currency strategist at Malayan Banking Bhd. Lim sees dollar-won falling to 1,300 by year-end on the back of converging growth and yield differentials between the US and South Korea. 

The Federal Reserve kicked off its easing cycle this month with a large 50 basis-point reduction. Even if the BOK loosens policy next week, the won may not rally, given the US central bank is set to ease further this year.

Index-compiler FTSE Russell will deliver its decision whether to include South Korea’s bonds in its global debt index on Oct. 8, with Lim saying the addition would “definitely lead to a lower dollar-won.” 

The nation has put necessary systems in place, according to Vice Finance Minister Kim Beom-seok, since being added to a watchlist for potential inclusion two years ago. However, banks such as Goldman Sachs Group Inc. have predicted Korean bonds will only be added to the FTSE index in 2025, while market participants at Nomura Holdings Inc, abrdn plc and Manulife have also flagged the risk of a delay. 

“Bond inflows should continue even without the bond index inclusion,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank, given the Fed’s decision to cut rates. Global funds have bought $15.3 billion of the nation’s bonds this quarter with inflows supporting the won should equity outflows continue amid worries AI valuations may hurt chipmakers.  

Peter Chia, a Singapore based FX strategist at United Overseas Bank Ltd., is bullish on the won but thinks the currency may have to wait until early 2025 until it hits the 1,300 level. He factors US elections into his view, predicting “uncertainties of a potential Trump win to be spurring some near-term USD demand, be it from inflationary effects of his proposed policies or due to safe haven.” 

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