In a new note to clients, Societe Generale’s Suktae Oh wonders if the Korean won has become the new “safe haven” currency.
“We would argue that the Korean won has become a ‘safe haven’ currency if commodity prices and the USD-KRW exchange rate continue to move in the same direction,” writes Oh in a new report. “The resilience of the won since August this year, despite the weakness in many emerging market currencies, is another indication that the won is behaving like a typical safe haven currency.”
So what would be the implications for the Korean economy?
- “One of the consensus views on Korea is that the won is serving as an automatic stabilizer for growth: it weakens when the global economic outlook worsens, which will support growth by boosting exports. But this view will no longer hold if the won strengthens when the global economic outlook worsens. Hence, the amplitude of cyclical fluctuation in GDP threatens to be greater than in the previous currency regime. In other words, economic conditions would become more volatile.”
- “The won will also no longer be an ‘automatic stabiliser’ for inflation. If it weakens when commodity prices rise due to stronger global demand, Korea’s inflation would accelerate. Also, if the won strengthens when commodity prices decline due to weak global demand or turmoil in global markets, Korea may face the problem of very low inflation or even deflation.”
- Monetary policy actions will become more important. “Policy rate movements would be greater in either direction than they were in the past,” according to the note.
“Of course, it is too early to make a firm conclusion: we should at least wait for a recovery in commodity prices and see whether the won weakens in that case,” writes Oh in the note.
Oh joins Morgan Stanley analysts, who also identified Korea as a “safe haven,” writing recently, “Unlike the rest of the region, Korea is not seeing any risk of a property bubble. It is probably one of the very few economies in AXJ that could even see upside in its property prices in the next three years rather than the possible correction we may expect in other countries.”