SEOUL (Dow Jones)–The South Korean won was lower late Tuesday as an unexpected fall in the yuan and concerns of further limits on foreign exchange forward trading weighed.
Sentiment for Asian currencies in general got a lift early in the day after China lowered the dollar-yuan central parity to CNY6.7980 from Monday’s CNY6.8275, setting the stage for the yuan to continue to rise after a strong finish Monday. But the Chinese currency reversed course and weakened, with traders reporting heavy dollar buying by several Chinese banks. At 0543 GMT, the dollar was trading at CNY6.8200 in the over-the-counter market.
“Still, China did make a move. And I think it’s appropriate to think that the latest move indicates China will allow its currency to appreciate, albeit gradually,” which will likely help the won, said a foreign bank trader.
With the recent breach of the key KRW1,190 support, many expect the dollar to resume its downtrend against the won in tandem with a modest economic recovery in Asia’s fourth-largest economy.
“Some will likely be biased to enter dollar-shorts in the mid-to-upper-KRW1,180s area,” on any rebound in the dollar, said a local bank trader.
Comments from a senior finance ministry official that the government aims to gradually reduce the ceiling on foreign exchange forward transactions by foreign banks operating in the country to match that for local banks also weighed on the won as this could mean tighter dollar liquidity in the system.
Cross currency swap rates fell following the news, with the one-year swap rate down at 1.175% late in Asia compared with 1.275% Monday. A lower cross currency swap rate means it is more expensive to borrow dollars in exchange for the won.
The shock from a reduction in forward transaction limits for foreign banks probably won’t be as large as when the government earlier this month unveiled comprehensive measures to ease the adverse impact of rapid capital flows on the local economy, said Woori Futures analyst Byeon Ji-young.
Domestic treasury bonds ended mixed after coming off intraday lows on bargain hunting following recent sharp falls. September futures ended down six ticks after losing as much as 20 ticks intraday.
Bonds initially fell early in the day on concerns that further limits on foreign exchange forward trading could eat away at foreign appetite for bonds, which is already weak amid lingering rate hike fears.
A local securities firm trader said the bond market is turning bearish, adding that the three-year yield will likely hit the 4.00% level.
-By Min-Jeong Lee, Dow Jones Newswires; 822-3700-1908; min-jeong.lee@dowjones.com
