The nation’s Financial Services Commission announced a number of changes on November 19.
It limited corporate hedging to no more than 125% of their actual foreign currency needs and asked financial institutions to hold more than 2% of foreign currency assets in liquid instruments rated A or above. There had been no such requirements before.
The government had hinted at these moves for months. It wants the won to appreciate gradually so as not to endanger the recovery in exports and, by extension, that of the wider economy.
It is also trying to limit over-hedging by exporters, which contributed to volatility in the foreign exchange markets late last year and early this year.
Some corporates may have over-hedged themselves to gain from the strengthening won, but when it weakened abruptly between September 2008 and March 2009, many were caught short and had to buy US dollars. This contributed to the won reaching an 11-year low in March, at nearly W1,600 to the US dollar.
But as the domestic economy recovered, the won has been a clear outperformer in Asia, having risen about 8% against the US dollar year-to-date.
“Ultimately there is appreciation pressure coming from the fact that credit crisis and panic is long past its worst,” says Mann. “There is a current account surplus and strengthening foreign inflows. We think there is a tolerance for a stronger currency, just not a rapidly strengthening currency.”
A slower appreciation is what the government is trying to achieve. In fact, Mann argues that the policies announced were “slightly less aggressive than the hints given over the last few months”.
“The real aim is to try and aim for stability and to be more prudent in their FX supervision and regulations,” he adds.
But Mann states this is not a form of capital controls, as some have suggest. “They have gone to painful lengths to try and stress that this is not some sort of capital control. They’re not trying to discourage flows in any way. They are stressing that any other major changes would be in line with international agreements.”
Even so, that did not prevent a knee-jerk reaction to the news. On November 19, the won traded at W1,161 against the greenback, compared with W1,154 the day before. Today (November 20) it had fallen slightly to around W1,164 at the time of writing.
“We had a bit of a knee-jerk reaction on the day itself [Nov 19],” notes Mann. “Some players in the market were getting frustrated about W1,150 just seeming to be a very strong support level and some people taking back some of their shorts.
“Also, the move today [Nov 20] could also be more to do with stocks being lower and people closing out of some of their positions.”
Mann believes that the won will trade in a range of W1,145 to W1,180 against the dollar in the next few weeks and maintains a year-end forecast of W1,150. By the end of 2010 he thinks the won will be trading at W1,050.