Foreign investors sold approximately $98 billion in Korean stocks year-to-date as the won-dollar exchange rate rose to the 1550s in July, following a breakthrough of 1500 won in May, according to Kyobo Securities. The selling is attributed to rebalancing by overseas passive funds. Despite a first-half trade surplus of approximately $138 billion, the massive foreign stock selling has driven the exchange rate higher, as semiconductor companies tend to retain export earnings overseas while foreign stock sales create direct dollar demand.
Foreign Stock Selling Reaches $98 Billion Year-to-Date
According to Kyobo Securities, foreign investors' cumulative selling of Korean stocks from the beginning of the year reached approximately $98 billion (based on a 1500 won exchange rate). This figure is comparable to the first-half cumulative trade surplus of approximately $138 billion, which had been expected to help resolve the won's undervaluation. While semiconductor companies tend not to fully repatriate dollars earned through exports, foreign stock selling directly translates into dollar demand, pushing the exchange rate higher.
The selling pressure is likely to continue in the near term. Passive funds focus more on KOSPI's relative performance against the MSCI EM (Emerging Markets) benchmark index rather than KOSPI's absolute level, and Korea's stock market continues to show relatively high performance.
Government Intervention Capacity Estimated at Maximum $50 Billion
Wi Jae-hyun, senior researcher at Kyobo Securities, stated that "the problem with rebalancing lies not only in its persistence but also in its scale," adding that "while foreign exchange authorities continue actual intervention and verbal intervention against the elevated exchange rate, there are no notable factors to cap the upper band if rebalancing selling continues in the second half." He emphasized the need to consider an upper band of 1600 won within the third quarter.
The foreign exchange authorities' defense capacity is not ample. Considering past patterns and foreign exchange reserve balances, the estimated maximum amount available for actual intervention by authorities to stabilize the market in the second half of this year is around $50 billion.
Semiconductor Investments Expected to Create Fund Repatriation Incentives
From a long-term perspective, Wi analyzed that there are signs the won's value will find stability. This is because large-scale domestic investments by major Korean companies, including the government's large-scale "semiconductor mega project," are anticipated. Since the scale of domestic investment is larger than the combined total of private companies' voluntary overseas investment and US-bound investment, export companies are expected to have greater incentives to repatriate overseas funds held in reserve.
Additionally, he anticipated that if overseas asset investments that expanded after COVID-19 begin to be recovered in earnest in the form of dividend and interest income, this structural change could serve as a support that gradually alleviates upward pressure on the exchange rate.
FAQ
What caused the won-dollar exchange rate to rise to the 1550s in July?
The won-dollar exchange rate rose to the 1550s in July following a May breakthrough of 1500 won, driven primarily by rebalancing sales from overseas passive funds. Foreign investors sold approximately $98 billion in Korean stocks year-to-date, creating substantial dollar demand that pushed the exchange rate higher despite a first-half trade surplus of approximately $138 billion.
How much intervention capacity do Korean authorities have for the exchange rate?
According to Kyobo Securities, considering past patterns and foreign exchange reserve balances, the estimated maximum amount available for actual intervention by authorities to stabilize the market in the second half of this year is around $50 billion. Wi Jae-hyun, senior researcher at Kyobo Securities, emphasized the need to consider an upper band of 1600 won within the third quarter.
