Government Requests 10% Currency Hedging on Overseas Assets in National Pension Fund

[Asia Economy Reporter Park So-yeon] It has been confirmed that the government requested the National Pension Service (NPS) to conduct currency hedging on 10% of its overseas investment assets as part of measures to stabilize the won exchange rate. If the NPS hedges 10% of its overseas investment assets, the amount of dollars supplied to the foreign exchange market will exceed 40 trillion won by simple calculation.

According to the investment banking (IB) industry on the 7th, the Ministry of Economy and Finance recently requested the NPS and the Ministry of Health and Welfare, the competent authority, to set this hedging ratio for at least six months. This agenda will be discussed at the NPS Fund Management Practical Evaluation Committee next week, followed by the Fund Management Committee, the highest decision-making body.

The scale of NPS's overseas investments amounts to 335.6 billion dollars (approximately 443.7 trillion won as of September). When the NPS invests overseas, it purchases spot dollars, which has been pointed out as a factor increasing dollar demand and causing the won to depreciate.

With the NPS raising the currency hedging ratio to 10%, the additional amount of dollars supplied to the foreign exchange market is expected to exceed 33.6 billion dollars (approximately 44.4 trillion won). Considering that the average daily dollar trading volume last month was 8.497 billion dollars (approximately 11.2 trillion won), this is expected to be a significant variable in the foreign exchange market.

When public institutional investors raise their currency hedging ratio, it brings a 'dollar supply' effect to the foreign exchange market. When the NPS sells dollar forward contracts for hedging, banks that purchase these contracts must sell spot dollars in the market to balance their dollar sell and buy positions. The release of dollars leads to a strengthening of the won exchange rate.