Won Hit by ‘VaR Shock’ May Face Even More Losses, Banks Say

South Korea’s tumbling won looks set for further declines as higher energy prices threaten growth in the world’s eighth-largest oil consumer, according to forecasters at some of the biggest global banks.Author of the article:You can save this article by registering for free here. Or sign-in if you have an account.(Bloomberg) — South Korea’s tumbling won looks set for further declines as higher energy prices threaten growth in the world’s eighth-largest oil consumer, according to forecasters at some of the biggest global banks.Subscribe now to read the latest news in your city and across Canada.Subscribe now to read the latest news in your city and across Canada.Create an account or sign in to continue with your reading experience.Create an account or sign in to continue with your reading experience.The won slumped more than 4% at one stage on Tuesday, the most since 2010, as concern about the Iran war sapped risk assets and spurred a value-at-risk or VaR shock, in which a cycle of selling sets in. The currency fell beyond the closely watched 1,500 per dollar level to the weakest since the global financial crisis, before retracing some of those losses on Wednesday. “A VaR shock led to huge capitulation and indiscriminate derisking moves yesterday,” said Wee Khoon Chong, a strategist at BNY in Hong Kong. In a “worst-case scenario” the won may weaken to around 1,570 per dollar, he said.Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againInterested in more newsletters? Browse here.A VaR shock occurs when sharp market moves cause investors to breach their Value-at-Risk limits, forcing them to cut positions even if they still believe in the underlying trade. This can lead to forced deleveraging and liquidation, with investors selling assets indiscriminately to reduce risk.The won retraced some of its recent losses Wednesday, appreciating 0.7% to 1,479.65 per dollar.The won is also being weighed down by a reversal of overseas inflows in the stock market as equities swoon. Foreign investors offloaded a net $3.5 billion of the nation’s shares on Tuesday, and have sold a net $562 million so far on Wednesday. The benchmark Kospi index has dropped more than 15% this week.The authorities will closely monitor whether the won and bond yields move excessively out of line with the country’s fundamentals such as the current-account balance, the Bank of Korea said in a statement Wednesday.The won has whipsawed in recent months, with gains being driven by the nation’s surging stock market, and losses caused by Seoul’s pledge to invest $350 billion in the US to help stave off higher American tariffs. The Iran war has now tipped the balance in favor of the bears, due to concern higher oil prices will hurt the nation’s trade balance.Currency options traders are among those who see scope for further won weakness. They’re assigning about a 36% chance that the currency will trade at 1,550 per dollar by the end of June, implied volatility shows. “Our model basically is showing a move toward 1,600 is possible should things get worse from here,” said Brendan McKenna, a strategist at Wells Fargo in New York. “Could the won sell off more if sentiment is damaged and oil prices continue to rise, sure.”Some PositivesThe won’s outlook is more encouraging over the medium term as South Korea rides the AI investment boom. Surging demand for high-bandwidth memory and advanced chips is expected to boost export receipts.“The won is linked to the memory cycle,” said Yuxuan Tang, head of macro strategy for Asia at JPMorgan Private Bank in Hong Kong, who sees potential for the currency to recover toward the 1,400 level. “It’s very well reflected in the equity market but there’s zero reflection in FX.”The prospect of central bank interest-rate hikes is another potential positive. Traders are currently pricing in about 50 basis points of tightening over the next 12 months, up from expectations of about 25 basis points of hikes seen at the end of last month, according to data compiled by Bloomberg.Others remain negative.“It does seem to be a market where folks are in a mindset to ‘sell first, ask questions later’ in terms of vulnerable economies and assets,” said Michael Brown, a strategist at Pepperstone Group Ltd. in Melbourne. “The Kospi plunging won’t help much as foreigners have been dumping holdings.”—With assistance from Marcus Wong and David Finnerty.Postmedia is committed to maintaining a lively but civil forum for discussion. Please keep comments relevant and respectful. Comments may take up to an hour to appear on the site. You will receive an email if there is a reply to your comment, an update to a thread you follow or if a user you follow comments. Visit our Community Guidelines for more information.