South Korean Won Advances Ahead

South Korean bonds experienced a decline, thereby resulting into the biggest increase in the 5-year yields since May, 2009. The Central Bank of South Korea unexpectedly decided to refrain from cutting down borrowing costs and the bonds mainly fell because of that. On the other hand, the major currency of the country, Won experienced the biggest rise in the last 2 weeks.

According to the Fixed Income Strategist of KB Investment & Securities Co., Lee Jae Seung, the market was shocked to see that the Bank of Korea has taken the exactly opposite route in comparison with others, when it comes to the interest rate. Seung added that the anticipated rate cut was already priced in the bonds market and now the investors are kind of running away.

The Governor of the Bank of Korea, Kim Choong Soo and his board held the benchmark 7-day repurchase rate at 2.75%, as far as the statement of the Monetary Authority is concerned. Many predicted that reductions will be introduced as tensions with North Korea increased thereby dampening the consumer and business sentiment. Global funds boosted the holdings of the local shares and as a result, Won went ahead.

As far as data released by the Korea Exchange Inc., the yield on the 2.75% Government notes which are due by March, 2018 increased by 20 basis points and are currently at 2.78%. This marks the biggest jump of the same since May, 2009. The cost to lock in the borrowing costs for one year using the interest rate swaps increased by 9 basis points and is currently at 2.68%. This is the biggest increase since 3rd March, 2011. On the other hand, the benchmark gauge Kospi Index kind of fluctuated between profit and loss, ultimately ending up 0.7% higher at 1949.80.

Won extended gains as soon as the rate decision was announced, as it rose by 0.9%. However, it adjusted the advance after North Korea showed signals of proceeding with a missile test. At the time of close of trading, Won strengthened by 0.6%, thereby reaching to 1129.25 per USD. This marks the currency’s biggest jump since 25th March. On the other hand, the 1-month implied volatility in the Won, declined by 37 basis points and is currently at 10.07%. Incidentally, implied volatility is used to measure expected moves in the exchange rate, thereby judging price options.