Time to buy Korean won: FX strategist

The Korean won is poised for a rebound, making the deeply undervalued currency an appealing bet for investors, particularly when paired against the overvalued Thai baht, according to a seasoned foreign exchange strategist.

Before the US-Israeli strikes on Iran that rattled global markets earlier this month, the Korean equity market had been booming; the benchmark Kospi briefly topped the 6,300 level for the first time, roughly doubling from a year earlier.

Despite the rally in stocks, the local currency remained stuck in the mid-1,400 won range against the dollar, reflecting what analysts say is a notably undervalued exchange rate even as equities surged.

The won’s weakness has been largely attributed to capital outflows, particularly Korean residents’ growing purchases of US equities. But Yan Wang, chief emerging markets strategist at Alpine Macro, an independent investment research firm based in Montreal, said those flows could soon reverse.

With more than 20 years of experience in financial research, Wang specializes in emerging markets and their currencies.

Historically, sustained outperformance in Korean equities has often been followed by a moderation or reversal of capital outflows, though with a lag, he explained.

“Looking back at prior cycles, the lag has typically ranged between three to nine months. Retail investors tend to chase performance only after it becomes durable. For institutional investors, asset allocation changes are also slow-moving,” he told The Korea Herald via email.

While geopolitical tensions in the Middle East continue to weigh on sentiment, Wang described the conflict as a source of “short-term volatility” for the won that is likely to fade. He expects the currency to strengthen once capital flows and economic momentum become more visible.

“Typically FX markets react later than equities in early cycles. Equities discount growth acceleration earlier than currencies. FX markets require confirmation via hard data, flow reversal and clear cyclical momentum,” Wang said.

“Exports are booming, but production has not fully responded due to prolonged destocking. The currency typically reacts more strongly once industrial production accelerates, growth data visibly turns higher and the restocking cycle becomes undeniable.”

Given these dynamics, Wang said investors could consider taking a long position in the Korean won against the Thai baht, which he described as one of the most overvalued emerging-market currencies in real effective terms.

“The fundamentals of the Thai baht are, in many respects, the polar opposite of those of the Korean won,” Wang said, noting that the baht appears particularly expensive relative to Thailand’s terms of trade — the reverse of Korea’s situation.

With the currency overvalued, Thailand’s economy may struggle to sustain it, increasing the likelihood of a decline in the baht, he added.

By contrast, the Korean won is trading at levels typically associated with financial crises despite the absence of crisis-level fundamentals, leaving it significantly undervalued.

“The bottom line is that we believe the Korean won is materially mispriced,” Wang said.

“External fundamentals are strong, cyclical momentum is improving, and the capital flow headwinds that weighed on the currency are likely to reverse.”