Asia’s best-performing currency in the third quarter is seen suffering the region’s worst loss in the coming year.
A four-month winning streak by the South Korean won is ending in October as overseas funds offload the nation’s stocks after Samsung Electronics Co scrapped production of its Note 7 smartphones due to a fire hazard. A looming rate hike by the Federal Reserve and mounting risks for Asia’s fourth-largest economy are adding to downward pressure. The currency, which climbed 4.6% versus the dollar last quarter, will sink 3.6% by September 30, according to a Bloomberg survey of analyst forecasts.
“Normally an individual company’s issue doesn’t sway the currency market, but Samsung is different,” said Min Gyeong-won, a currency analyst at NH Futures Co in Seoul. “The company is so huge, its troubles have both economic and financial-market implications. This doesn’t bode well for the won.”
Trouble at Samsung, whose revenue is the equivalent to one- fifth of gross domestic product, may weigh on growth, Bank of Korea Governor Lee Ju-yeol said after trimming its GDP expansion forecast for 2017 to 2.8% from 2.9%. Corporate restructuring in shipping and shipbuilding sectors has already hurt employment, sending the jobless rate to 4% in September, the highest since February.
The currency, down 1.9% this month to 1,123.07 per dollar in Seoul yesterday, will drop to 1,143 by year-end, according to the median forecast in Bloomberg survey. The won will finish 2016 in a range of 1,140 to 1,150, NH’s Min said.
Deputy Finance Minister Lee Chan-woo told a briefing on Monday the impact of Samsung’s problems would depend on whether its buyers stay loyal and how swiftly it introduces new models. Samsung said in a statement on Tuesday it will fully compensate component suppliers suffering from the Note 7 discontinuation, as it investigates the cause of the fires.
Other exporters are also struggling. Automakers’ overseas shipments plunged 24% last month due to a workers’ strike, which caused production to drop by 140,000 cars in the nation’s worst labour disruption in more than a decade.
“One area that I am concerned most about and watching carefully is the job market,” said Stephen Lee, an economist at Samsung Securities Co, which sees the currency hitting 1,200 by year-end. “The fourth-quarter employment figure is seen being poor, which adds to existing concerns about domestic consumption.”
Sue Trinh, head of Asia foreign-exchange strategy at RBC Capital Markets in Hong Kong, said global factors in addition to the risk of higher US rates may cause the won to weaken to 1,250 by year-end. The futures-based odds of the Federal Reserve hiking this year climbed to 63% on Tuesday from 61% on October 3.
The won suffered its biggest rout in almost five years the day after the UK voted on June 23 to leave the European Union. It slumped 1.6% last week as the yuan fell the most since January.
“You’ve got uncertainty about what the Fed rate outlook is going to be, uncertainty about Brexit and a renewed push towards depreciation of the yuan,” Trinh said. “All these factors are potentially eroding risk appetite.”
Domestic and international factors could drag the won to 1,155 by year-end, according to Chung Sung-yoon, a currency analyst at Hyundai Futures Corp in Seoul.
“Major South Korean companies from electronics to automakers are grappling with crisis now,” Chung said. “Macroeconomic data will be impacted in the next quarters, and this comes at a time when investors see more reasons to avoid risks.”