(Jan 13): The South Korean won may extend losses after sliding to the lowest since 2009, as political risks and slowing economic growth reinforce the case for more interest-rate cuts.

The currency could slide to the key psychological level of 1,500 per dollar, a level last reached 16 years ago, after tumbling to 1,486 last month, according to Malayan Banking Bhd and Mizuho Securities. The widening discount in South Korea’s 10-year government bond yield to its US counterpart will add to the pressure.

A depreciating currency would further worsen sentiment towards South Korean assets, after a brief imposition of martial law and the impeachment of President Yoon Suk Yeol rattled investors. Policymakers have acted swiftly to contain the fallout, but strategists warn that the won is at risk of further declines.

“USD/KRW is likely to stay volatile, given the possibility of extended political instability and upside risks remain with the possibility of testing the 1,500 resistance,” Maybank analysts including Saktiandi Supaat wrote in a recent note.

The export-dependent economy’s struggles have complicated the picture. The gauges for consumer confidence and business outlook both recently deteriorated the most since the Covid-19 pandemic. The government cut its economic growth forecast for the year.

“Corporate earnings are coming out weaker than expected, the political turmoil is yet to settle, and won carry isn’t that good in the first place — a cocktail of factors that are won-negative,” Shoki Omori, chief desk strategist at Mizuho Securities in Tokyo, said, adding the 1,500-level is becoming “increasingly realistic.”

Given the wobbling economy, economists at Citigroup and Korea Investment & Securities Co anticipate the central bank would cut the interest rate to 2.75% this month. 

The currency could receive support from authorities. The nation will take “bold and swift” measures to address volatility, Acting President Choi Sang-mok said earlier this month.

Support for the won will also come from the nation’s largest pension fund. The National Pension Service (NPS) expanded a swap deal that lowers the fund’s need for dollar purchases directly in the foreign exchange market. The NPS is also expected to sell up to almost US$50 billion (RM225.58 billion) worth of dollars and other foreign currencies, in a hedging move after the won’s recent weakening.

“We believe that efforts for financial market stabilisation, including the start of a strategic hedging by the NPS, will help moderate upside risks to our six-month ahead USD/KRW forecast of 1,450,” Goohoon Kwon and Andrew Tilton, economists at Goldman Sachs, wrote in a note.

Uploaded by Jason Ng