It was a rush of blood to the head moment for Korea’s president Yoon Suk Yeol it seems, but the attempt to impose martial law on Korea, supported by cooked up claims of a North Korean plot, could have some serious repercussions for the Korean Won (KRW).
The Korean president is now facing a very likely impeachment from his own parliament, but the dramatic affairs in Seoul this week have caused international investors to sit up and take notice. This was the first time the Korean government had sought to declare martial law since the winter of 1979-80.
Standard & Poor’s said in a statement on Wednesday that it did not consider the situation in Korea sufficient to impact the country’s credit rating and that the Korean economy was unlikely to be affected. Korea currently has a long term AA rating on its debt. S&P executives at a press conference in Seoul said the short-term nature of the crisis, and the fact that it was not provoked over financial concerns, did not warrant further revisions.
That said, the crisis does shine a light on the somewhat rudderless and increasingly chaotic presidency of Yoon Suk Yeol himself, who is likely to be leaving office very soon. A former prosecutor himself, he has led the high profile prosecutions of two former Korean presidents, but his political mandate has been razor thin since taking office two years ago.
- Armchair Academy: Introduction to Micro FX Futures
- Mexican peso under further pressure against strong USD
- Silver and copper exports boosting Chile’s peso
- Is the US Treasury yields correction an attractive entry point for the Euro?
Raids by police on the homes of journalists who were critical of Yoon further reinforced an image of a president who perhaps still thought he was running early 1980s Korea. In this context the sudden decision to bring the army in looks less ludicrous, but still out of step with modern Korea.
Yoon has not enjoyed a majority in parliament, which has hampered his ability to pass legislation, and he has exercised the presidential right of veto more than any other Korean president since military rule ended in 1987.
What is the forecast for the Korean won?
While the Korean economy looks in good shape – The Armchair Trader was in Korea last month and can attest to this – the political crisis will dominate the headlines for a while and this will impact the Korean won.
The KRW dropped sharply against the dollar off the 1400 level when martial law was first declared. When it then emerged that Yoon was not going to be able to keep emergency powers in place and parliament looked like it was back in control, the Korean won made up some of that ground pretty rapidly in the course of Wednesday.
We are now seeing the forex market in a wait and see posture with traders keeping tabs on the news flow out of Seoul. The KRW was weaker against the USD over Thursday’s trading session with the market looking at 1410-1420 as a sensible trading range. This is still well down against the USD from last week.
There was some further selling of the won in Asian markets on Friday hitting the 1424 level briefly, but we are currently seeing the higher end of the earlier range prevailing as European markets open.
Longer term some forex analysts now reckon we will see the KRW weakening against the USD over the next few months. Bank of America Securities in Singapore said that it was anticipating lower interest rates in Q1 for Korea, with the central bank acting to smooth out volatility in the currency. BofA’s FX team in Asia said it was anticipating a 1450 level for the KRW against the USD “relatively soon.”
