Outlook mixed as Korea‘s pension giant weighs on foreign exchange hedging
As South Korea’s currency market grapples with heavy fluctuations, attention is turning to whether the nation's sovereign wealth fund, the National Pension Service, can help stabilize the won by bolstering its foreign exchange hedging strategies.
The Korean won had a rough year-end as the country struggled with ongoing political turmoil, involving impeachments and protests. The won’s value plunged to 1,486.7 per dollar during intraday trading on Dec. 27, recording its worst in over 15 years.
Yet, despite the lingering political uncertainties tied to the country, the local currency partially recovered its value earlier this month, reaching 1,444.5 per dollar on Jan. 8. The figure marks an over 40 won gain from the won's latest dip.
The won’s rebound is attributed to expectations of a potential softening in US tariff policies under the upcoming second Donald Trump administration and possible intervention by the NPS. While the pension fund has remained silent, the market speculates the NPS executed a forward deal through a foreign bank on Jan. 7.
However, with the stronger-than-expected US employment data tempering hopes for a US Federal Reserve rate cut, the won closed at 1,471.1 per dollar on Monday, weakening by 6.1 won from the previous trading day. It was the first time in two weeks for the won to devalue against the dollar to the 1,470 range since hitting 1,472.5 won on Dec. 30.
NPS: A market stabilizer?
Forex authorities have hinted at the potential role of the NPS in recent weeks.
“With the exceptional (won-dollar) exchange rate, the NPS could benefit from forex hedging for risk management and profitability,” said Bank of Korea Gov. Rhee Chang-yong on Dec. 23. “A macroeconomic strategy is needed, given the NPS’ influence on the forex market.”
“The NPS is likely to start forex hedging after internal discussions,” said Yoon Kyeong-su, director of the BOK’s international department, on Jan. 2. “This could contribute to stabilizing the (won-dollar) exchange rate.”
These comments are seen as verbal signals from the BOK and the Finance Ministry, indicating readiness to manage market volatility proactively.
The NPS has avoided making an official statement on its potential intervention in the forex market, likely to prevent market disruptions and safeguard the profitability of its investment strategies.
Explicitly confirming its intent to intervene could make its approach more predictable, potentially undermining its effectiveness. When asked for clarification, an NPS official stated that the fund's involvement in forex activities "cannot be confirmed," leaving its stance ambiguous and open to speculation.
Up NPS‘ sleeve
The NPS uses forex hedging to shield itself from currency fluctuations. By selling part of its dollar-denominated assets through future or forward contracts, the fund increases dollar supply in the market. This added supply eases upward pressure on the dollar, strengthening the won.
Currently, the NPS’ standard forex hedge is capped at 5 percent of its overseas assets but can rise to 15 percent during periods of high volatility. But critics argue that increased hedging could reduce profitability, as greater exposure to the strong dollar is generally more lucrative. Despite concerns, the NPS reinstated its hedging strategy in 2022 after abandoning it in 2015.
Another option is a currency swap deal between the BOK and the NPS. In December, the two institutions agreed to raise the upper limit from $50 billion to $65 billion. This arrangement allows the NPS to access BOK-held dollars for overseas investments without affecting market dynamics as directly as forex hedging.
Limited impact?
The NPS manages a 1,171 trillion won pension fund, with $482.8 billion invested overseas as of October. Fully utilizing its 15 percent hedging capability could supply around $70 billion to the Korean market, potentially strengthening the won by 30 to 40 won.
However, some experts remained cautious about the action's sustainability, stressing that sustained, gradual intervention is essential for lasting market effects.
“The NPS’ hedged dollars would temporarily support the won, but the impact would fade once the supply dries up,” said Park Sang-hyun, an analyst at iM Securities. “Incremental and frequent hedging would be the most effective approach to temper the strong dollar.”
By Im Eun-byel (silverstar@heraldcorp.com)
