'Exchange Rate Rise ≠ Stock Market Fall'... "Yen-Dollar Exchange Rate Changes More Important"

The Won-Dollar Exchange Rate Plummeted 23 Won in One Day
KOSPI Also Fell 0.8%
Changes in Yen-Dollar Exchange Rate More Important

[Image source=Yonhap News]

Kiwoom Securities pointed out that in the current situation where the usual formula between the exchange rate and the stock market (KRW-USD exchange rate rise = stock price decline) is not working well, it is more important to check the changes in the JPY-USD exchange rate rather than the KRW-USD exchange rate.

Han Ji-young, a researcher at Kiwoom Securities, stated, "It is more meaningful to monitor the changes in the JPY-USD exchange rate related to the anxiety over the unwinding of the yen carry trade than the KRW-USD exchange rate."

On the previous day (19th), the domestic stock market showed movements completely opposite to the existing market expectations. The KRW-USD exchange rate plunged by 23 won in one day, reaching the 1330 won level, but the KOSPI fell by 0.8%. This was because foreigners recorded a net selling of about 110 billion won. This phenomenon was completely different from the usual market formula of 'KRW-USD exchange rate decline (KRW appreciation) = stock market strength, foreign net buying.'

Regarding this, the researcher analyzed, "Two factors overlapped: the cautionary sentiment from the Bank of Japan (BOJ) governor's remarks and the expectation of a Federal Reserve (Fed) interest rate cut."

Furthermore, the researcher cited the background for the existing formula not working well in this year's market as △ maintaining a trade surplus trend compared to the past high exchange rate era △ upward earnings forecasts of domestic listed companies compared to past high exchange rate periods △ structurally increased foreign currency exchange demand due to the surge in overseas stock investments by domestic investors.

The researcher emphasized the need to focus on the JPY-USD exchange rate from this perspective. Last week, speculative net long positions on the yen, as compiled by the Commodity Futures Trading Commission (CFTC), turned positive for the first time since March 2021, indicating a surge in demand for yen appreciation bets.

However, the researcher diagnosed, "During the same period last week, the JPY-USD exchange rate formed a range of 146 to 149 yen, showing a rather weak yen trend," suggesting that the influence of speculative funds on the yen's directionality is diminishing.

He added, "The speed of yen appreciation and the unwinding of the yen carry trade will proceed gradually rather than rapidly as seen from late July to early August," and "In such a scenario, the stock market is expected to have limited price shocks due to yen appreciation."

Seo Sang-young, a researcher at Mirae Asset Securities, analyzed the previous day's KRW appreciation (sharp drop in KRW-USD exchange rate) as an effect of yen synchronization. He explained that the exchange rate and stock market moved separately.

He said, "Speculative positions disappeared in the CFTC data, which means the outlook for yen depreciation has changed to appreciation," and "The exchange rate market has become sensitive to yen appreciation factors such as the possibility of hawkish remarks by the BOJ governor in parliament."

Researcher Seo explained, "Meanwhile, recent synchronization between the yen and the won has caused the KRW-USD exchange rate to plunge as the won supply and demand also acted along with the yen appreciation outlook."