South Korea's currency, the won, has been rising against the
currencies of its major trading partners, China, the United
States, the European Union and Japan. South Korea's economy is
heavily dependent upon exports, which made up 44.6 percent of GDP
Since the beginning of the year, the South Korean won has
risen by 6.4 percent against the U.S. dollar, 5.5 percent against
the euro, six percent against the Chinese yuan and 13 percent
against the Japanese yen.
South Korean government officials are worried. So much so that
they intervened in the currency market on Thursday, buying up to
$1 billion in an effort to weaken the won, according to the
The FT reported that South Korean officials are considering
tightening restrictions on trading currency derivatives to curb
the won's volatility in the currency market. South Korean deputy
finance minister Choi Jong-gu, told the FT, "Recent movement of
the market shows that the volatility continues to increase,
mainly driven by some expectation that the won will continue to
The rapid appreciation of the won against the U.S. dollar
affects Korea's trade with two of its major trading partners, the
United States, which accounts for 11.1 percent of South Korea's
exports, and China, which is South Korea's biggest export market,
taking 25.8 percent of South Korea's total exports.
China's currency, the yuan, is not freely convertible and
trades in a designated band around the U.S. dollar set by Chinese
monetary authorities. Unless China widens the trading band, which
they do on occasion, the yuan will generally rise or fall against
other currencies in line with the U.S. dollar.
That means that, all else being equal, South Korean companies
are earning about six percent less on nearly 37 percent of their
exports than they were at the beginning of the year. To put it
another way, if prices remain stable, South Korea has to increase
export volume by six percent just to stay where they were in
That is why the sharp appreciation of the South Korean won
against the Japanese yen is so important.
Japan is South Korea's second largest trading partner after
China, accounting for 10.7 percent of South Korea's total trade.
But, of South Korea's four main trading partners, Japan is the
only one that runs a trade surplus with South Korea.
South Korea imports large quantities of industrial goods,
particularly chemicals and machinery, from Japan. Much of this is
incorporated into South Korean products that are exported to the
rest of the world, including Japan.
Much of South Korea's competitive advantage in automobiles,
construction equipment, electronics and steel comes from the fact
that the won has been persistently weak against the Japanese yen
for the past five years. If the exact same LCD TV were built in
South Korea and Japan, the Korean model would be much cheaper
because of the weak won.
With the yen now 13 percent cheaper against the won than it
was at the beginning of the year, South Korea is losing some of
its competitive edge in its export markets. If currency Is less
of a factor, other competitive advantages and disadvantages
between Korean and Japanese companies come into play.
If traders want to take a view on the trend in the South
Korean won, one way to do this is through a pair trade between
the iShares MSCI South Korea Index (NYSE:
) and the iShares MSCI Japan Index (NYSE:
If you think the appreciation of the won against the yen will
continue, they you would short EWY and go long EWJ. If you think
the trend will reverse, then short EWJ and go long EWY.
Regardless of your view, the seldom-watched Japanese yen/South
Korean won exchange rate will be the key to which country will
have a relative competitive advantage in 2013. Keep your eye on
the chart below:
Chart from Yahoo Finance
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