UBS On NPS Swap Facility

UBS weighs in on the NPS swap facility announcement from last week. The bottom line is the bank doesn't see the facility as a game changer for the won, although they have taken profit on a long JPY/KRW recommendation.

"On 13th April 2023, the BoK, MoF and NPS (National Pension Service) agreed on a FX swap line of up to $35b that will last until the end of 2023. This FX swap agreement, wherein the BoK could enter a 6m-1y USDKRW FX swap (sell-buy) with the NPS, is targeted at alleviating FX depreciation pressure. A similar, but smaller sized (10bn$), agreement was last signed in Sep-22. That coincidentally was close to the multi-year top in USDKRW.

This FX swap is neither stated to be a mandatory requirement nor does it have to be dealt in full size. Nonetheless, our read is it's an implicit policy signal. If properly enforced, this deal could potentially take this year’s 15-20bn$ of gross dollar demand off the market.

Is KRW a long then? Not beyond a modest near-term correction. With Korean exports still recording a y/y contraction of mid-teens, manufacturing IP in deepest contraction since early 2009 and very weak capacity utilization in the manufacturing sector, the won will not be immune to a potential US recession or/and a related credit event. Likewise, unlike early 4Q, when KRW was c.10% cheap on financial fair value models, it screens about fair today. Nonetheless, we are cognizant that it has been a crowded short, and has underperformed significantly (KRW TWI fell by ~2 S.D. in three months). Likewise, the policy put could potentially cap USDKRW’s topside. As such, we take profits on our long JPYKRW recommendation and await clearer tech cycle signals or overshoots to take the either side."