Rising Won has South Korea Worried

South Korea’s currency, the won, has been rising against the currencies of its major trading partners, China, the United States, the European Union and Japan. South Korea’s economy is heavily dependent upon exports, which made up 44.6 percent of GDP in 2010.

Since the beginning of the year, the South Korean won has risen by 6.4 percent against the U.S. dollar, 5.5 percent against the euro, six percent against the Chinese yuan and 13 percent against the Japanese yen.

iShares Dow Jones US Home Const. (ETF) (NYSEARCA:ITB)

South Korean government officials are worried. So much so that they intervened in the currency market on Thursday, buying up to $1 billion in an effort to weaken the won, according to the Financial Times.

The FT reported that South Korean officials are considering tightening restrictions on trading currency derivatives to curb the won’s volatility in the currency market. South Korean deputy finance minister Choi Jong-gu, told the FT, “Recent movement of the market shows that the volatility continues to increase, mainly driven by some expectation that the won will continue to appreciate further.”

The rapid appreciation of the won against the U.S. dollar affects Korea’s trade with two of its major trading partners, the United States, which accounts for 11.1 percent of South Korea’s exports, and China, which is South Korea’s biggest export market, taking 25.8 percent of South Korea’s total exports.

China’s currency, the yuan, is not freely convertible and trades in a designated band around the U.S. dollar set by Chinese monetary authorities. Unless China widens the trading band, which they do on occasion, the yuan will generally rise or fall against other currencies in line with the U.S. dollar.

That means that, all else being equal, South Korean companies are earning about six percent less on nearly 37 percent of their exports than they were at the beginning of the year. To put it another way, if prices remain stable, South Korea has to increase export volume by six percent just to stay where they were in January.

That is why the sharp appreciation of the South Korean won against the Japanese yen is so important.

Japan is South Korea’s second largest trading partner after China, accounting for 10.7 percent of South Korea’s total trade. But, of South Korea’s four main trading partners, Japan is the only one that runs a trade surplus with South Korea.

South Korea imports large quantities of industrial goods, particularly chemicals and machinery, from Japan. Much of this is incorporated into South Korean products that are exported to the rest of the world, including Japan.

Much of South Korea’s competitive advantage in automobiles, construction equipment, electronics and steel comes from the fact that the won has been persistently weak against the Japanese yen for the past five years. If the exact same LCD TV were built in South Korea and Japan, the Korean model would be much cheaper because of the weak won.

With the yen now 13 percent cheaper against the won than it was at the beginning of the year, South Korea is losing some of its competitive edge in its export markets. If currency Is less of a factor, other competitive advantages and disadvantages between Korean and Japanese companies come into play.

If traders want to take a view on the trend in the South Korean won, one way to do this is through a pair trade between the iShares MSCI South Korea Index Fund (NYSEARCA:EWY) and the iShares MSCI Japan Index (NYSEARCA:EWJ).

If you think the appreciation of the won against the yen will continue, they you would short iShares MSCI South Korea Index Fund (NYSEARCA:EWY) and go long iShares MSCI Japan Index (NYSEARCA:EWJ). If you think the trend will reverse, then short iShares MSCI Japan Index (NYSEARCA:EWJ) and go long iShares MSCI South Korea Index Fund (NYSEARCA:EWY).

Regardless of your view, the seldom-watched Japanese yen/South Korean won exchange rate will be the key to which country will have a relative competitive advantage in 2013. Keep your eye on the chart below:

Chart from Yahoo Finance

This article was originally written by Jeff Uscher, and posted on Benzinga.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Top Reasons For Getting Fired

The 3 Best States to Start an LLC

10 Jobs That Allow You to Travel

7 High-Paying Jobs You Can Do From Home

12 Best Cities to Shop in USA

10 Best States To Practice Medicine

The 10 Best States to Have a Business

The 12 Most Expensive Apple (AAPL) Apps in the Market

The 10 Richest Billionaires in the World

10 Biggest Kickstarter Failures

The 10 Best Places to Work At

The Top 10 of Google Inc (GOOGL)’s Most Expensive Acquisitions

13 Best Cities to Visit in South America

10 Most Expensive Works of Art of All Time

The 10 Richest Banks in the World

The 10 Best-Paying Jobs in America (2014)

7 Most Expensive Foods in the World

The World’s Top 10 Earning Authors

Five Wicked and Very Expensive Items (and Other “Stuff”) Sold on eBay

10 Biggest Celebrity Bankruptcies

The Top 10 Highest Paid CEOs in 2014

The 10 Most Expensive Real Estate Cities in America

10 Most Expensive States To Live In America

The 10 Best Airlines in the World

The 10 Best-Selling Cars in 2014

The 10 Best Industries to Invest In

The 10 Most Expensive States to Own a Car In

Top 10 Business Schools in US: 2014 Rankings

Top 20 Female Billionaires in 2014

6 Movies That You Should Watch to Better Understand The Cold War

Top 15 Best Paying Jobs for Women in 2014

Top 6 Things Rich People Do Differently Every Day

5 Retirement Mistakes To Avoid (and Einstein’s Famous Quote)

11 Smartest People in the World

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!