Will 'Foreigners' Net Bond Purchases' Continue After the August Monetary Policy Committee Meeting?
August Monetary Policy Committee Preview
Foreign Net Buying Expected to Continue Even if Base Rate Hike Is Decided
[Asia Economy Reporter Junho Hwang] Even if interest rate hikes occur in South Korea this month, it is expected that foreign investors' spot and futures buying of domestic bonds will continue.
On the 22nd, Jonghyun Cho, a researcher at Shinhan Financial Investment, said, "Although the swap rate (the difference between the spot exchange rate and the forward exchange rate) may act unfavorably, its influence on the direction is limited, as seen in the 2010 case," adding, "Next month, the amount maturing for foreigners is 6.1 trillion won, the second largest this year, and given the attractiveness of the absolute interest rate, foreign investors' net buying momentum can continue."
In 2005, 2010, and 2017, when the base interest rate was raised consecutively, the net buying or net selling trend of foreigners was maintained before and after the rate hikes. Only the intensity differed.
Considering foreigners' net buying trend and the swap rate, the current situation is most similar to 2010. At that time, strong buying continued even after the base rate hike on the 10-year treasury. Like then, this year's swap rate has been positive since June. This reflects the perception that interest rate hikes could be implemented faster than in the United States.
Researcher Cho explained, "Of course, factors such as the U.S. economic peak-out debate and the Delta variant virus, which strengthen the dollar, may offset this, but the medium- to long-term direction seems likely to remain positive (+)."
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Meanwhile, the Bank of Korea's Monetary Policy Committee will hold a monetary policy direction meeting on the 26th. The Bank of Korea has expressed its intention to raise the base interest rate within this year three times since May. However, the atmosphere is changing as social distancing measures have been strengthened due to the fourth wave of COVID-19.
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