South Korean Won: Equity rout drives downside hedging – MUFG
Michael Wan at MUFG notes that a sharp sell-off in South Korean equities has boosted demand for South Korean Won downside protection. The KOSPI fell heavily, led by semiconductor names amid concerns over Chinese competition and AI capex sustainability. KRW risk reversals show investors paying more for protection, consistent with sizeable foreign equity outflows and related Won selling.
South Korean equity markets have witnessed a significant sell-off, prompting investors to seek protection against the South Korean Won's depreciation. The KOSPI index fell by 5.5%, reaching a low of 6,035, as semiconductor companies like Samsung Electronics and SK Hynix led the decline. This market downturn has been driven by concerns over Chinese competition, particularly in the semiconductor sector, and the sustainability of AI-related capital expenditures.
The increased demand for KRW downside protection is evident in the rise of KRW risk reversals, reflecting that investors are willing to pay more for hedging against potential won depreciation. This trend aligns with the reported $3.3 billion in foreign equity outflows from South Korea in the previous day, leading to a conversion of proceeds into foreign currencies.
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