Soaring Exchange Rates... Will Foreigners' Return Be Delayed?

Fear of the 4th COVID-19 Wave Drives Won-Dollar Exchange Rate to Intraday Record of 1150 Won
Number of Confirmed Cases Influences Market... Won Stabilization Possible Around September
Foreigners Selling Except Late April This Year
In Weak Won Market, Dividend Stocks Recommended Over Export and Domestic Stocks for KOSPI Strategy

[Asia Economy Reporter Song Hwajeong] Due to the impact of the 4th wave of the COVID-19 pandemic, the won-dollar exchange rate has risen, breaking the year's high, drawing attention to its effect on the stock market. The return of foreign investors, who have been continuously selling this year amid the strong dollar, is expected to be delayed.

On the 15th, in the Seoul foreign exchange market, the won-dollar exchange rate started at 1,145 won, down 3.5 won. After surpassing 1,150 won during the previous day’s session and setting a new yearly high, it showed signs of slight stabilization. The previous day’s exchange rate closed at 1,148.5 won per dollar, up 3.1 won.

Recently, both domestic and international conditions have exerted upward pressure on the won-dollar exchange rate. Kwon Amin, a researcher at NH Investment & Securities, explained, "Externally, risk-off sentiment spread due to deflation concerns caused by the spread of the Delta variant virus from late June to early July, leading to a strengthening of the Swiss franc and Japanese yen, while U.S. long-term interest rates fell. Additionally, concerns over monetary policy normalization following the higher-than-expected U.S. June Consumer Price Index (CPI) contributed to the won’s depreciation. Domestically, the sharp rise in daily new COVID-19 cases to the highest levels played a significant role."

In particular, as the domestic spread of COVID-19 is influencing the rise in the won-dollar exchange rate, it is suggested that a slowdown in the number of confirmed cases must be confirmed for the won’s value to stabilize. Lee Seunghoon, a researcher at Meritz Securities, said, "Three factors are simultaneously affecting the won: global dollar strength, the pace adjustment of yuan strength, and the domestic spread of COVID-19. The recent weeks’ trend can be explained more by the decoupling from the yuan due to COVID-19 spread rather than the global dollar strength or yuan pace adjustment, indicating won weakness caused by domestic unique factors."

During the first and second domestic waves in February-March and August-September last year, the won-yuan exchange rate also showed a lag of 1-2 weeks following new confirmed cases. On the 14th, the won-yuan exchange rate at 177.3 won was the highest level since March 23, 2023. If the won-yuan had moved in line with the yuan without a sharp domestic spread, fluctuating around 172 won, the current won-dollar rate should be in the 1,110 won range rather than 1,150 won. The researcher added, "Ultimately, for the won’s value to stabilize, a slowdown in domestic COVID-19 confirmed cases must be observed. So far, the pattern of confirmed cases has shown stabilization within one month after a sudden surge followed by strong social distancing measures. Considering this, the period around September is likely when won stabilization will resume."

The rise in the won-dollar exchange rate (won depreciation) is expected to delay the return of foreign investors, who have maintained a selling trend this year. Foreign investors have shown a selling trend every month except April this year. They have sold more than 2 trillion won this month alone. Roh Donggil, a researcher at Shinhan Financial Investment, said, "The exchange rate is highly sensitive to the domestic foreign exchange market’s reaction to the COVID-19 spread, which has a significant impact on the stock market. The overshooting of the won-dollar exchange rate could increase mechanical net selling of domestic stocks by foreign investors."

Dividend stocks were suggested as a strategy to respond to won depreciation. Kang Hyunki, a researcher at DB Financial Investment, analyzed, "Despite the won’s depreciation, the decline in Korea’s net commodity terms of trade growth rate may cause margin erosion for export stocks, and recommending domestic consumption stocks is difficult amid rising COVID-19 cases. On the other hand, the possibility of tapering (asset purchase reduction), which affects the won’s depreciation, tends to lead to a decline in long-term interest rates, enhancing the relative attractiveness of dividend stocks."

This content was produced with the assistance of AI translation services.