Equal Benchmark Interests
Amid weakness of the Korean won continuing due to a US interest rate hike this month, American Otto Warmbier’s death after his returning to the US triggered a firestorm among Americans to deteriorate rapidly the political and diplomatic environment surrounding the Korean peninsula. The won-dollar exchange rate, which was 1,110 won per dollar early this month, has risen above 1,140 won.
In the Seoul foreign exchange market on June 21, the won-dollar exchange rate started trading at 1,141 won, which was 5.6 won higher than the previous trading day. The won-dollar exchange rate which fell to 1,118 won early this month started to climb as the US executed its second interest rate hike this year, making the benchmark interest rates of Korea and the US virtually equal. The won-dollar exchange rate, which rose to 1,130 won after the US interest rate hike, is at the 1,140 won level in two months after April 19 (based on the closing price of 1,140.2 won).
The new South Korean administration is scheduled to have the first Korea-US summit later this month. As Otto Warmbier, an American citizen who returned to the United States in a coma after his trip to North Korea, died, not only US civil society but also the Congress and the White House are strongly criticizing North Korea. During the summit, US President Donald Trump is expected to bring up the renegotiation of the South Korea-US Free Trade Agreement (FTA) along with a pressure on Korea to reduce trade surplus with the United States. It is expected that amidst this, the death of Otto Warmbier will make the US more offensive over the North Korean nuclear and missile issue about which South Korea and the US have subtle different opinions. If relationships between Korea and the US and between the US and North Korea freeze, global funds may leave the Korean market as geopolitical risk is accentuated.
In addition, Morgan Stanley Capital National (MSCI)’s inclusion of Chinese A shares into emerging markets is likely to spur foreign capital outflow from South Korea. According to the Financial Services Commission, when the Chinese A index is added to the MSCI Emerging Markets Index, it is estimated that about 600 billion won (US$540 million) to 4.3 trillion won (US$3.8 billion) will flow out of the South Korean stock market. This is because China will accounts for 28.4% of the emerging market index, up from 27.7%, and Korean for 15.2%, down from 15.5%.
On the same day, the exchange rate at Hana Bank at 9 am started trading at 1,024.7 won, an increase of 6.86 won from the previous trading day.