Stocks Are Crying, but the Won Is Smiling... Diverging Signals from the KOSPI and Exchange Rates [Weekend Money]

Foreign Selling Weighs on Stocks
Semiconductor Export Boom Supports the Won
Diverging Fund Flows and Economic Outlooks
AI Investment and Export Resilience Are Key

Looking at their stock accounts brings a sigh, but buying dollars for overseas travel feels less burdensome. That is the curious picture emerging from South Korea's stock and foreign exchange markets. The KOSPI is falling sharply, while the value of the won is rising. Why are two markets responding to the same Korean economy pointing in different directions?

Park Sanghyun, a researcher at iM Securities, focused on the won-dollar exchange rate falling to 1,326 won amid the KOSPI correction. This is different from past periods of sharp stock market declines, when the won weakened as well. A recent example was 2021-2022. As the KOSPI corrected during that period, the won-dollar exchange rate rose from around 1,080 won to the mid-1,400s. This time, however, the exchange rate has fallen even as the KOSPI has slumped since the end of June. The familiar interpretation that stock price declines immediately lead to a weaker won does not seem to fit.

Park cited the changing flow of funds between the two markets as the first reason. Since January last year, foreign investors' cumulative net sales of domestic stocks have exceeded KRW 200 trillion. If foreign investors convert the proceeds from their sales into dollars and take them out of the country, that would also put downward pressure on the won in the foreign exchange market. But foreign currency earned through exports also flows into the market. The boom in semiconductor exports and the large trade surplus are supporting the value of the won, he explained.

iM Securities forecast that the current account surplus would reach around $450 billion for the year. Some forecasts suggest that a similar-sized surplus could continue next year. Park explained, "Moreover, while major countries are struggling with fiscal deficits, South Korea is expected to post a modest fiscal deficit of 1.0% of gross domestic product (GDP) this year and a surplus of 1.6% of GDP next year." He added, "This is supporting the won's strengthening trend from the perspective of economic fundamentals."

He also said the dollar-yen exchange rate was weighing on the domestic stock market. Park said, "The dollar-yen exchange rate no longer has as much influence over the export competitiveness of South Korea and Japan as it once did. However, when the won-yen exchange rate falls, the KOSPI has underperformed the Nikkei." He added, "In that respect, the recent sharp drop in the yen-won exchange rate to around 830 won seems to be contributing, to some extent, to the divergence between global and domestic stock markets, as well as between the domestic stock and foreign exchange markets."

The stock and foreign exchange markets, then, continue to see things differently. The stock market is reflecting concerns about the future: if enthusiasm for artificial intelligence (AI) investment cools, the semiconductor boom could weaken as well. The foreign exchange market, by contrast, is seen as placing greater weight on the possibility that the export strength and surpluses evident today will continue. One market is looking at a slowdown ahead, while the other is focused on a boom that is still ongoing.

The key question is how long the semiconductor export boom will last. Unlike during past stock market corrections, exports and the trade surplus remain solid, suggesting that the divergence between the two markets could narrow to some extent. Park forecast, "Export and trade balance trends during past correction periods were very different from what we are seeing now." He added, "Ultimately, the divergence between global and domestic stock markets, and between the domestic stock and foreign exchange markets, will be resolved to some extent."

This content was produced with the assistance of AI translation services.