The South Korean won outperformed most currencies overnight as domestic risk assets rallied. The KOSPI rose as much as 8.5% before ending 4.6% higher, and it is up 92% year-to-date, making it the world’s best performing equity market on strength in AI-linked semiconductors. Samsung Electronics and SK Hynix represent a large portion of the benchmark, reinforcing the index’s sensitivity to the sector’s momentum.
Monetary policy also provided support after Bank of Korea Governor Shin Hyun Song reiterated a hawkish stance centred on price stability. At the May 28 meeting, the BoK kept the policy rate unchanged at 2.50% for the eighth consecutive meeting, while signalling that a Base Rate increase could be warranted at an appropriate time. The next decision is due on July 16, and markets are increasingly pricing a 25 bps move that would take the rate to 2.75%.
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Strength in Currency and Stock Market Driven by Semiconductors
We are seeing strong performance from South Korean assets, with the Won strengthening and the KOSPI index climbing. The stock market is up nearly 18% year-to-date, fueled by an AI-led boom in semiconductors. Recent reports show Samsung and SK Hynix have secured over 95% of the market for the latest generation of memory chips, attracting significant foreign investment.
The Bank of Korea is providing a clear tailwind for the currency by signaling its intent to prioritize price stability. The governor’s comments point to an interest rate hike before it’s too late, making a 25 basis point increase at the July 16th meeting very likely. This hawkish stance makes the Won attractive compared to currencies with more neutral or dovish central banks.
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Trading Opportunities and Risk Positioning Around the Central Bank Decision
In response, we are positioning for a lower USD/KRW exchange rate in the coming weeks. With the pair trading near 1,350, we believe buying KRW call options or USD put options are effective strategies to capitalize on a potential move towards 1,320. Historically, the Won has often rallied in the weeks leading into a well-telegraphed rate hike.
We also note that implied volatility on KRW options is hovering near its yearly lows. This suggests the market might be underpricing the potential for sharp movements around the central bank’s decision. We feel that buying cheap volatility through instruments like straddles could be a prudent way to trade the upcoming event risk.
On the equity side, the KOSPI’s momentum should not be ignored, as it recently cleared the key 2,850 resistance level. We are looking at KOSPI 200 index call options to maintain exposure to the semiconductor rally. This strength in equities tends to create a positive feedback loop, drawing in more capital and further supporting the Won.
