The South Korean central bank's surprisingly hawkish monetary policy and persisting tensions over North Korea's nuclear threats are spurring foreign investors to pull cash out of Seoul's debt market.
Evidence can be seen in the cross-currency basis, which is the spread between currency and interest rate swaps and reflects foreign participation in Korean markets.
The Korean won currency basis, the main indicator of foreign investor sentiment on Korean assets, has turned more negative since mid-March, reflecting the heavy interest onshore in converting won to dollars.
The swaps basis also reflects the rise in interest rate swaps after the Bank of Korea surprised markets with its decision not to cut policy rates on April 11.
Foreigners normally pay the cross-currency swap (CCS) when they invest onshore, selling spot dollars for won and buying them back for a future date.
"The more negative the basis becomes, the more disadvantages existing foreign investors will have," said Yoon Yeo-sam, fixed-income analyst at Daewoo Securities.
"But the current level is not seen as showing panic because dollar liquidity is not seriously scarce here," Yoon said.
During the first two weeks of April, foreigners reduced net investment in South Korean bonds by 500 billion won ($446.17 million) and dumped 1.2 trillion won worth of stocks, according to a financial regulator.
The one-year basis stood at -89 on Tuesday, but not far from Monday's -94 of its lowest since July 12. The weakness reflects that the CCS has been falling since mid-March and has shed 44.5 basis points in nearly five weeks to reach 1.2550 percent.
Last week, the central bank kept its base rate unchanged at 2.75 percent. Its reluctance to cut rates in the face of political pressure has stoked expectations it will stand pat next month as well. That lifted bond yields, with the five-year yields rising on April 12 to 2.76 percent, a one-month high. Foreign investors have been selling treasury bond futures.
Interest rate swaps, which are derivatives used to hedge yield movements, have also risen.
The cross currency basis historically tends to turn negative during periods of risk aversion.
For instance, in November 2010 when North Korea bombed an island in the South, the one-year won currency basis fell to -204 basis points. The basis hit a record low of -267 in October 2011 when worries about Greece's fiscal crisis rattled global markets.
Compared with October 2011, the widening of the swap basis has been relatively muted in the past two months, possibly because market participants expect the Bank of Japan's new aggressive quantitative easing policy will drive more money into neighbouring markets such as Korea's.
But other factors are at play too, including that the Bank of Korea is suspected of providing dollar liquidity to stem a slide in the won, emerging Asia's worst performing currency this year. South Korean exporters' demand for the won has also reduced volatility in dollar/won forwards.
"The basis is not as negative as before because of the improved external position of Korea," said Frances Cheung, a strategist with Credit Agricole in Hong Kong.
"And if the basis gets quite negative, some foreign investors would actually be attracted back, for asset swap trades for example," she said, referring to trades where foreigners swap dollars for won investments.
Source: http://www.brecorder.com/business-a-finance/banking-a-finance/115415.html
Evidence can be seen in the cross-currency basis, which is the spread between currency and interest rate swaps and reflects foreign participation in Korean markets.
The Korean won currency basis, the main indicator of foreign investor sentiment on Korean assets, has turned more negative since mid-March, reflecting the heavy interest onshore in converting won to dollars.
The swaps basis also reflects the rise in interest rate swaps after the Bank of Korea surprised markets with its decision not to cut policy rates on April 11.
Foreigners normally pay the cross-currency swap (CCS) when they invest onshore, selling spot dollars for won and buying them back for a future date.
"The more negative the basis becomes, the more disadvantages existing foreign investors will have," said Yoon Yeo-sam, fixed-income analyst at Daewoo Securities.
"But the current level is not seen as showing panic because dollar liquidity is not seriously scarce here," Yoon said.
During the first two weeks of April, foreigners reduced net investment in South Korean bonds by 500 billion won ($446.17 million) and dumped 1.2 trillion won worth of stocks, according to a financial regulator.
The one-year basis stood at -89 on Tuesday, but not far from Monday's -94 of its lowest since July 12. The weakness reflects that the CCS has been falling since mid-March and has shed 44.5 basis points in nearly five weeks to reach 1.2550 percent.
Last week, the central bank kept its base rate unchanged at 2.75 percent. Its reluctance to cut rates in the face of political pressure has stoked expectations it will stand pat next month as well. That lifted bond yields, with the five-year yields rising on April 12 to 2.76 percent, a one-month high. Foreign investors have been selling treasury bond futures.
Interest rate swaps, which are derivatives used to hedge yield movements, have also risen.
The cross currency basis historically tends to turn negative during periods of risk aversion.
For instance, in November 2010 when North Korea bombed an island in the South, the one-year won currency basis fell to -204 basis points. The basis hit a record low of -267 in October 2011 when worries about Greece's fiscal crisis rattled global markets.
Compared with October 2011, the widening of the swap basis has been relatively muted in the past two months, possibly because market participants expect the Bank of Japan's new aggressive quantitative easing policy will drive more money into neighbouring markets such as Korea's.
But other factors are at play too, including that the Bank of Korea is suspected of providing dollar liquidity to stem a slide in the won, emerging Asia's worst performing currency this year. South Korean exporters' demand for the won has also reduced volatility in dollar/won forwards.
"The basis is not as negative as before because of the improved external position of Korea," said Frances Cheung, a strategist with Credit Agricole in Hong Kong.
"And if the basis gets quite negative, some foreign investors would actually be attracted back, for asset swap trades for example," she said, referring to trades where foreigners swap dollars for won investments.
Source: http://www.brecorder.com/business-a-finance/banking-a-finance/115415.html
No comments:
Post a Comment