Korean won breaches key level, triggering potential $50b pension hedge

South Korea’s won has weakened to levels that could compel the National Pension Service (NPS) to sell up to $50 billion in foreign exchange to mitigate losses, according to insiders familiar with the situation.

If the currency’s average closing rate surpasses approximately 1,450 won per dollar over five consecutive business days, the NPS is set to activate strategic currency hedging, the sources told Bloomberg. This measure would remain in effect until a substantial drop in the exchange rate occurs.

As of Thursday afternoon in London, the won traded at 1,448.63 per dollar, having earlier hit 1,453.77, marking an over 11 per cent decline in value this year.

The NPS, which oversees $485.5 billion in foreign-currency assets as of September, is mandated to hedge up to 10 per cent of its holdings if the exchange rate deviates significantly from a long-term average spanning over 20 years. The 1,450 threshold, breached during this week’s market turbulence, aligns with the pension fund’s internal trigger for implementing its hedging strategy, sources revealed.

If the hedging plan is activated, the NPS would likely sell more foreign currency next year than it purchases, reversing its recent practice of acquiring $2 billion to $3 billion in foreign currency monthly. As the largest player in South Korea’s foreign-exchange market, a pivot by the NPS could ease the downward pressure on the won.

The won has emerged as Asia’s worst-performing currency this year, weighed down by domestic political uncertainty surrounding the impeachment of President Yoon Suk Yeol and the dollar’s robust appreciation.

This strategic shift by the NPS underscores the growing economic pressures in South Korea and the critical role of the pension fund in stabilizing the nation’s financial markets. Whether this intervention will bolster the won or further disrupt market dynamics remains to be seen.

Attribution: Bloomberg