[Why&Next]Authorities' "Seohak Ants Recall" Strategy Calms Sentiment at First... "Year-End Key Is 1,450 Won"

'Christmas Eve Warning Letter from Authorities': Exchange Rate Drops by 33.8 Won
High-Intensity Policy Measures Including Incentives for Seohak Ants, Calming Market Sentiment
Key Focus on Year-End Level Below 1,450 Won... Market Expects 1,440~1,450 Won
Time Needed to Confirm Tangible Effects
"Downward Trend Expected Early Next Year if Supply-Demand Improves"

Following a "warning letter" from the foreign exchange authorities on Christmas Eve, the won-dollar exchange rate recorded its largest drop in three years and one month, quickly falling below the 1,450 won mark. Experts assessed that the government has achieved initial success in curbing the market sentiment that had been betting on a high exchange rate, by mobilizing all policy tools, including an unusually strong verbal intervention and incentives for "Seohak Ants" (individual investors in overseas stocks). However, they pointed out that it will take time for these policies to show tangible effects and for supply and demand among different investor groups to actually improve, so the situation should be monitored going forward. They agreed that whether the year-end level stays below 1,450 won will be a key point.

"Stronger Than Expected": Market Recognizes Authorities' Determination, Easing of Weak-Won Sentiment

On December 26, the won-dollar exchange rate in the Seoul foreign exchange market opened at 1,449.9 won, up 0.1 won from the previous trading day, and was fluctuating in the low 1,450 won range as of 9:30 a.m. Experts evaluated that the government's all-out efforts to stabilize the foreign exchange market the previous trading day were "stronger than expected," and unanimously stated that the previously one-sided weak-won sentiment is likely to ease significantly.

On December 24, as the won-dollar exchange rate approached 1,485 won, the government announced a strong verbal intervention and unveiled the "Domestic Investment and Foreign Exchange Stability Tax Support Plan." The goal is to encourage the return of "Seohak Ants" to the domestic market. To this end, the government introduced a tax benefit that reduces the capital gains tax (20%) for individual investors who reinvest funds from selling overseas stocks into domestic stocks for the long term. In addition, a new forward contract product for individual investors was introduced, granting tax benefits for those who hedge currency risk during overseas stock investments. The market assessed these measures as stronger than anticipated. However, the "carrots" given to companies were seen as more predictable. The government raised the tax exemption rate (non-taxable income ratio) for dividends received by domestic parent companies from overseas subsidiaries from the current 95% to 100%.

Lim Hwanyeol, a researcher at Woori Bank, said, "Until now, the market had doubted the authorities' determination, which kept the exchange rate at high levels, but on December 24, the government made its intention to 'definitely stabilize the exchange rate' clear by simultaneously announcing strong interventionist remarks, actual intervention volumes, and supply-demand improvement measures. This will have an impact on stabilizing market sentiment going forward." Choi Jiuk, a researcher at Korea Investment & Securities, also pointed out that these measures "will help stabilize the sentiment that had been excessively tilted toward a weak won."

There are also assessments that the actual foreign exchange supply and demand will partially improve. Park Sanghyun, a researcher at iM Securities, said, "Despite the tax revenue burden, the government has boldly implemented tax measures to stabilize the foreign exchange market, so there will be actual improvement in supply and demand. While it is unlikely that individual investors' overseas investments will decrease dramatically, short-term profit-taking by individuals to benefit from tax advantages could contribute to supply and demand improvement." There is also an assessment that companies may increase the repatriation of retained earnings from overseas subsidiaries.

In addition, considering the likelihood that the National Pension Service will begin full-scale currency hedging at the end of the year and the beginning of next year, there is expected to be downward pressure on the exchange rate not only from sentiment but also from actual supply and demand. Jo Yonggu, a researcher at Shin Young Securities, said, "Exemptions from foreign exchange charges and interest payments on excess foreign currency reserves (foreign currency reserve interest), which are measures to prepare for large-scale currency hedging by the National Pension Service, were unexpected by the market. The timing and content of the government's announcement were appropriate for calming the exchange rate."

Year-End 1,450 Won Is Key..."Downward Trend Expected at the Start of the Year Based on Fundamentals"

On the 24th, employees are monitoring the stock market and exchange rates at the Hana Bank headquarters in Jung-gu, Seoul. Photo by Yonhap News

Experts agreed that attention should be paid to whether the year-end level will close below 1,450 won in order to maintain stable market sentiment going forward. The general view is that the year-end closing price will be in line with this, at around 1,440 to 1,450 won.

They also expect the won-dollar exchange rate to show a gradual decline at the beginning of next year. However, they pointed out that it will take time to verify whether supply and demand actually improve. Researcher Jo Yonggu said, "If actual supply and demand change, market expectations will also change in the process. This could provide further downward momentum, but it will take several more months to confirm this, so a verification process is needed." He added, "I previously expected the upper bound at the beginning of the year to be 1,480 won and the lower bound to be 1,430 won, but now I think it could go a bit lower, to around 1,425 won." Researcher Park Sanghyun also said, "If the measures continue to have some effect and the favorable trend for exchange rate stabilization continues, it is possible that the exchange rate could be in the low 1,400 won range in January or February."

As for future variables, the continuation of risk-on sentiment was cited. Researcher Lim Hwanyeol said, "Since the won is classified as a risk currency, whether the risk-on sentiment continues and the stock market remains strong, leading to a positive trend for the won, will be key." He added, "Along with the continuation of the weak dollar, this needs to be closely monitored." He continued, "The most important factor in lowering the exchange rate is how much actual dollar supply is released into the market. Ultimately, efforts to boost expectations for domestic stock price increases and similar factors will be necessary."