South Korea’s central bank calls on its pension fund to defend the weak won

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SEOUL (Reuters) – South Korea’s central bank said on Friday it was setting up a currency swap deal with the National Pension Service to divert some of the fund’s foreign currency needs, in a bid to put a floor under the rapidly weakening won.

The Bank of Korea and the NPS said the $10 billion currency swap deal will last until the end of this year to allow the fund to access the bank’s foreign exchange reserves.

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Traders said that if the NPS did this rather than selling won for dollars in the onshore spot market, it would remove a big source of dollar demand.

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The arrangement would also complement the bank’s interventions in the foreign exchange markets to support the won.

“The NPS can secure the funds needed for overseas investments without counterparty risk, and the deal should also stabilize the foreign exchange market by dampening the fund’s demand for dollars in the foreign exchange spot market,” the statement said. BOK in a statement.

The South Korean won weakened to over 1,400 to the dollar this week for the first time since 2009, down 16% for the year. The won was one of the hardest hit emerging market currencies in the face of the soaring US dollar.

The won’s slump has boosted expectations of a faster pace of interest rate hikes by the BOK in this year’s last two policy rate reviews, scheduled for Oct. 12 and Nov. 24, as policymakers would like curb any new outflow of capital. The current BOK policy rate is 2.50%.

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Aggressive Fed tightening has seen earned dollar yield differentials widen to 0.75 percentage points this week.

The NPS manages $626.6 billion, assets equivalent to about 40% of annual gross domestic product, and has invested heavily overseas, its operations weakening the won as it buys billions of dollars.

“This may temporarily boost sentiment for the won as it redirects dollar buying strength out of the fund, but it looks like there is no floor for the won’s fall at the moment,” a trader said. after the announcement.

The country’s largest-ever trade deficit in the first half of this year is also stoking bearish sentiment towards the won, at a time when the Fed continues to tighten policy and the energy crisis in Europe stokes fears of a global slowdown.

The won’s fall recently prompted the BOK and the Ministry of Finance to backtrack, but their warnings failed to prevent the won’s fall to the 1,400 level.

“There doesn’t seem to be a resistance level anymore, unlike when the won was hovering around 1,300 per dollar. Even smoothing trades won’t work if other currencies, including the euro, fall like now,” said a forex trader. (Reporting by Cynthia Kim; Editing by Vidya Ranganathan, Sam Holmes and Hugh Lawson)


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