The South Korean won continued its strong downward trend, reaching its lowest level since 2009, despite the ongoing Kospi Index surge. The USD/KRW exchange rate surged to 1,550, up sharply from the year-to-date low of 1,420.
South Korean won, and the Kospi divergence continues
The South Korean won and the country’s stock market have diverged significantly this year. While the currency has depreciated by over 7%, the blue-chip Kospi Index has more than doubled.
This performance is mostly because the two are being driven by different factors. The stock market is surging amid the ongoing artificial intelligence (AI) boom, which has pushed Samsung’s and SK Hynix’s market capitalizations to over $1 trillion.
This growth may continue in the near future as companies are still spending billions of dollars on data centers. For example, the top four biggest companies in the industry have pledged to spend over $750 billion in capital expenditure this year.
On the other hand, the South Korean won is plunging due to the ongoing US-Iran crisis, which has become a quagmire. The Strait of Hormuz is still closed, with the hope that it will be opened any time soon fading.
As a result, the country has been forced to import oil from other countries and to tap into its strategic petroleum reserve. In March, the country agreed to release 22.46 million barrels to help bridge the gap. This inventory drawdown will likely continue as long as the economy is dependent on oil imports from the Strait.
The US-Iran crisis has escalated this week, with Iran launching major attacks towards Kuwait, a top US ally. This happened after the US launched some major attacks against Iran.
South Korea economy is being impacted negatively by the war
While the semiconductor business is booming, the reality is that the country’s economy is being impacted negatively by the war. Recent data shows that the country’s annual inflation jumped 3.1% in May from 2.6% in the previous month.
This increase was slightly higher than the 3.0% that most analysts were expecting, and was the highest figure since March. Food and energy prices jumped the most during the month.
On the positive side, recent data showed that the economy is seeing strong growth. It expanded by 3.60% in the first quarter of the year, the fastest growth since the first quarter of 2021. Therefore, there are concerns that the war will derail this economic growth.
The USD/KRW exchange rate continued rising because of the ongoing weakness in Asian currencies. For example, the Indian rupee and Japanese yenhave all slumped to their lowest levels on record this year, pushing the central banks to intervene.
Looking forward, the next key catalyst for the USD/KRW exchange rate will be the upcoming US non-farm payrolls (NFP) data. Economists expect this report to show that the economy created 85k jobs in June this year, as the unemployment rate remained at 4.3%.
USD/KRW technical analysis
USDKRW chart | Source: TradingView
The daily chart shows that the USD to KRW exchange rate has been in a strong bull run in the past few months. It has jumped from a low of 1,440 in May to the current 1,541.
The pair has remained above all moving averages and has invalidated the double-top pattern whose neckline is at 1,440, its lowest point on May 6. It has remained above all moving averages, a sign that the bullish trend, potentially to 1,600 will continue.
The post USD/KRW: Here’s why the South Korean won is falling as Kospi Index surges appeared first on Invezz
