Exporters' dollar sales hold the won to a 0.75% slide on a 5.46% Kospi plunge

Ten won on a prior close of 1,335.1 ^[15] is a 0.75% move ^[16]. The index fell 5.46% ^[7], so it fell about 7.3 times as far as the exchange rate rose ^[17]. The direction was the one the usual rule predicts, since foreign investors who sell and take their gains out do so in dollars ^[13]. The size was a fraction of it. In our view the correlation has shrunk more than it has broken, or rather it was swamped on this session by a flow of dollars the stock market does not set, and one session is a thin base for anything stronger.

The offset came from exporters. Korea JoongAng Daily quoted a foreign exchange trader at a commercial bank but did not name the trader. "Dollar supply continues from factors such as the conversion of SK hynix's U.S.-listed American depositary receipts and dollar selling by exporters." ^[2] The same trader said more sellers "are now looking to unload dollars in advance" ^[3]. Min Kyung-won, a researcher at Woori Bank, said: "Even if semiconductor stocks undergo a correction, the supply of dollars backed by actual exports will continue separately." ^[4]

Park Sang-hyun, a researcher at iM Securities, described a second channel that runs the other way. "This is a phenomenon that was rarely seen in the past," he said ^[20]. He gave a reason. "If we had to identify a reason, the sharp appreciation of the won's value and increased currency volatility appear to be encouraging foreign investors to sell Korean equities." ^[21] The article adds that some analysts see foreigners selling to pare the losses they would take converting gains into dollars ^[22]. If that holds, the strong won is partly a cause of the foreign selling it appeared to survive.

We think the near-term lesson is narrow. Min expects exporters to keep selling. In his words: "That means dollar selling is likely to emerge whenever the exchange rate rises [and the won weakens]." ^[6] On that view the won lags the index in a sell-off for as long as the export flow lasts. A short-won hedge pays little. The article does not address hedging, so that step is ours.

Ahn Ki-tae of NH Investment & Securities makes the counter-case. It is a fair one. In his words: "Strong exports support a stronger won, but dollar demand from foreign direct investment, including investment in the United States, as well as overseas investment by institutions such as the National Pension Service, is expected to offset part of the dollar supply." ^[23] He said: "The dollar-won exchange rate is likely to remain in the mid-to-high 1,300 won range." ^[24] If that offsetting demand grows, the export cushion thins and the old link returns.

Two things would prove us wrong: a session of similar foreign selling in which the won moves several times 0.75% ^[16], or a day on which exporters stop selling dollars into weakness. The article covers a single session.