"Showing their hand and playing poker: FX authorities… even if they press the won, the rate rebounds to 1,480" [Kim Ik-hwan’s Ministries, Hands Up]

Analysis by Ahn Dong-hyun, professor at Seoul National University

"The policy deck is already exhausted… we should have finished it in last month’s intervention"

"Ammunition is only $28 billion… blaming retail ‘ant investors’ misses the point"

Ahn Dong-hyun, a professor in the Department of Economics at Seoul National University, said on the 15th, "No matter how much the FX authorities try to pull down the won-dollar exchange rate, it’s obvious as day that it will climb back to around 1,480 won."

He added the same day, "The moment they revealed that the FX authorities’ psychological line of resistance is the 1,480-won level, the ‘easy game’ with the market was over." At the end of last year, when the exchange rate reached the 1,480-won level, the FX authorities launched strong intervention. Soon after, the perception spread in the market that the authorities’ resistance line was 1,480 won. Against that backdrop, the assessment is that the exchange rate—after falling following intervention—resumed its rise and rebounded to just shy of 1,480 won.

Professor Ahn is regarded as one of Korea’s leading financial scholars, combining theory and practice in macroeconomics and capital markets, having served as head of quantitative strategy at the Royal Bank of Scotland (RBS) and as president of the Korea Capital Market Institute.

He pointed to a strategic misstep by the FX authorities, saying, "The government has already played every policy card it can—pressuring companies gathered together to put up negotiation (dollar-selling) volumes, and even offering to cut capital gains tax for retail investors returning after selling overseas stocks," adding, "It’s no different from showing your hand first and then playing poker."

He also judged that the authorities do not have ample room to intervene. Professor Ahn said, "With the current account surplus continuing, foreign exchange reserves stood at $428.1 billion at the end of last year, maintaining a stable level," but explained, "If reserves fall below $400 billion, the exchange rate could surge, so the ammunition that can actually be used is only $28 billion."

He also said it was regrettable that the FX authorities did not respond more boldly during the intervention at the end of last year. "The situation has become more serious because they failed to fully break the strong exchange-rate momentum when they intervened forcefully at the end of last month," he said. "If you intervene, you should step in prepared to see it through." He added, "They should have pressed the exchange rate down hard into the low-to-mid 1,300s, or intervened more aggressively in the 1,450s to break the trend." He went on to say, "Because they tried to conserve reserves, the effect of intervention was weak," adding, "Market participants have also sized up all of the FX authorities’ cards and are reacting that it ‘doesn’t hurt much.’"

He argued that the FX authorities have also failed to manage market expectations around a rising exchange rate. "Whether the FX authorities win or lose depends on how they handle expectations," he said. "By bringing up the exchange rate first, the authorities instead drew the market’s attention, making expectations management even harder."

On the FX authorities pointing to retail ‘ant investors’ as the cause of the exchange-rate rise, he said, "Although the Bank of Korea governor and others mentioned retail ‘ant investors’ and explained the increase in broad money (M2), this has only a tangential relationship with the exchange rate." He added, "Structural factors are far larger—capital outflows due to a worsening business environment such as the introduction of the Serious Accidents Punishment Act and the Yellow Envelope Act, and an annual $20 billion leaving the country in line with U.S.-focused investment-fund flows." He continued, "They are blaming only retail ‘ant investors’ or National Pension Service benefit issues while turning a blind eye to these structural problems," and asked, "How can the exchange rate stabilize if they don’t look at the root cause?"

Reporter Kim Ik-hwan lovepen@hankyung.com