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KRW: HSBC Sees Risks USD/KRW Revisits 2022 Highs In 2025

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HSBC: "The KRW weakened slightly after the Bank of Korea (BoK) unexpectedly cut rates for a second time in a row. In its statement, the BoK said export growth is likely to “fall short of initial expectations” due to tech industry-specific factors and a possible rise in trade tensions globally. The Finance Minister separately commented that the KRW has been weakening on external factors, similar to many other currencies.

We should not take these actions and comments as indicative that the Korean authorities have no qualms with KRW depreciation. In the post-MPS press conference, the BoK governor stressed that the authorities have the willingness and ability to curb FX volatility (note: the BoK has disclosed nearly USD80bn of FX sales since mid-2021), and suggested that the BoK’s swap arrangement with National Pension Service (NPS) will be extended and expanded. 

Our view on USD-KRW is that it will likely, at some point in 2025, revisit the high levels last seen in September-October 2022. The external backdrop is unfriendly for a relatively low-yielding and export-oriented currency like the KRW. There are also persistent domestic factors weighing on the KRW. Portfolio outflows by retail investors and institutional investors are even larger than the NPS’s. Daily data on retail outflows suggest that their bond outflows in November could be one of the highest on record, and they have also resumed purchases of foreign equities after briefly stopping in September-October. Meanwhile, foreigners’ portfolio inflows to Korea are more fickle (equity outflows since August have reversed more than half of the inflows in the months prior) and also more likely to be FX-hedged (note: WGBI indexation inflows that are less likely to be asset-swapped are only expected at the end of 2025). Corporates’ outward direct investments have been large and are likely to rise further if trade tensions intensify." 

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HSBC: "The KRW weakened slightly after the Bank of Korea (BoK) unexpectedly cut rates for a second time in a row. In its statement, the BoK said export growth is likely to “fall short of initial expectations” due to tech industry-specific factors and a possible rise in trade tensions globally. The Finance Minister separately commented that the KRW has been weakening on external factors, similar to many other currencies.

We should not take these actions and comments as indicative that the Korean authorities have no qualms with KRW depreciation. In the post-MPS press conference, the BoK governor stressed that the authorities have the willingness and ability to curb FX volatility (note: the BoK has disclosed nearly USD80bn of FX sales since mid-2021), and suggested that the BoK’s swap arrangement with National Pension Service (NPS) will be extended and expanded. 

Our view on USD-KRW is that it will likely, at some point in 2025, revisit the high levels last seen in September-October 2022. The external backdrop is unfriendly for a relatively low-yielding and export-oriented currency like the KRW. There are also persistent domestic factors weighing on the KRW. Portfolio outflows by retail investors and institutional investors are even larger than the NPS’s. Daily data on retail outflows suggest that their bond outflows in November could be one of the highest on record, and they have also resumed purchases of foreign equities after briefly stopping in September-October. Meanwhile, foreigners’ portfolio inflows to Korea are more fickle (equity outflows since August have reversed more than half of the inflows in the months prior) and also more likely to be FX-hedged (note: WGBI indexation inflows that are less likely to be asset-swapped are only expected at the end of 2025). Corporates’ outward direct investments have been large and are likely to rise further if trade tensions intensify."