Rising Expectations for Interest Rate Cuts... $1.72 Billion Net Inflow of Foreign Securities Investment in December

Since the Federal Open Market Committee (FOMC) meeting in December last year, expectations for a rate cut by the U.S. Federal Reserve (Fed) have strengthened, leading to a continued net inflow of securities investment funds into the domestic market.

According to the "International Finance and Foreign Exchange Market Trends since December 2023" report released by the Bank of Korea on the 10th, foreign securities investment funds recorded a total net inflow of $1.72 billion last month.

Among securities investment funds, equity funds saw a net inflow of $2.52 billion. This has remained positive since turning to a net inflow of $2.64 billion in November last year. The Bank of Korea explained, "The easing of concerns over prolonged global high interest rates and expectations for a recovery in the semiconductor industry have contributed to a substantial continued net inflow."

However, bond funds experienced a net outflow of $790 million, turning negative after one month. The Bank of Korea stated, "With active investment limited ahead of the year-end and some investors realizing profits due to the decline in domestic market interest rates, a slight net outflow occurred."

In December, the average daily foreign exchange transaction volume in the domestic interbank market (based on foreign exchange brokerage firms) was $32.76 billion, an increase of $580 million compared to the previous month ($32.18 billion).

The credit default swap (CDS) premium for Korean government bonds (based on the 5-year Foreign Exchange Stabilization Fund bonds) averaged 27 basis points (bp) in December, down 10 bp from 37 bp in the previous month. (1 bp = 0.01 percentage points)

CDS are financial derivatives that act as insurance to compensate for losses when the issuing country or company defaults. The premium tends to rise when the economic risk of the country increases.

The average KRW-USD exchange rate fell sharply from 1,350.5 won in October last year to 1,290 won in November (a drop of 60.5 won), then slightly decreased to 1,288 won in December, before rising again to 1,316 won as of the 8th of this month. The Bank of Korea explained, "Despite the weak dollar in December last year, the decline was limited due to a correction following the sharp drop in November, and the rate rose in January this year in line with the strengthening of the dollar."

The volatility of the KRW-USD exchange rate slightly decreased compared to the previous month. In December, the daily fluctuation in the KRW-USD exchange rate was 7.6 won, smaller than November's 8.2 won, and the volatility rate was 0.58%, down from 0.62% in November.

[Image source=Yonhap News]

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