South Korea and the United States have agreed not to manipulate exchange rates for competitive advantage. They also stated that measures related to macroprudential and capital flows won’t target these rates. Both countries will share information on foreign exchange interventions each month, indicating that such interventions will only happen during extreme volatility, whether it involves depreciation or appreciation. The joint statement from South Korea and the US did not mention a bilateral currency swap or South Korea’s pension fund. As a result of the agreement, the South Korean Won fell, with the USD/KRW rate rising from 1,402.50 to 1,409.45, a 0.20% increase for the day.

Risks And Recommendations

The information provided contains forward-looking statements that include risks and uncertainties. The markets and instruments mentioned are for informational purposes only and do not serve as investment recommendations. It is essential to conduct thorough research before investing, as trading in open markets can lead to significant risks, including the possibility of total loss. The views expressed in the article do not represent FXStreet’s official position, and the author does not hold any positions in the mentioned stocks. FXStreet does not offer personalized recommendations and is not responsible for any errors, omissions, or investment-related losses. The new foreign exchange agreement suggests that South Korean authorities are less likely to step in to strengthen the won. This indicates we should expect increased volatility in the USD/KRW pair in the coming weeks. Traders should be ready for larger daily price fluctuations than we have seen recently. This new environment makes buying options volatility an appealing strategy. The implied volatility for one-month USD/KRW options has already increased to 9.5%, a level not reached since the global inflation concerns in 2023. This indicates that the market is starting to factor in a period of greater uncertainty.

Market Reaction And Strategic Moves

The market reacted quickly, pushing the USD/KRW rate toward 1,410, showing a clear upward trend for the pair. Therefore, it may be wise to consider taking long positions in USD/KRW, possibly using call options to limit downside risk. This strategy tests price levels we haven’t firmly approached since the market turmoil of late 2022. This policy change signifies a major shift in strategy. For instance, the Bank of Korea sold a net $5.9 billion in foreign reserves during the second quarter of 2024 to support the won. Under this new agreement, such intervention is much less likely, unless market conditions become extremely unstable. We should also consider this in light of recent economic data from South Korea, which revealed a 4% year-over-year drop in exports to China last month. A weaker won may help boost the country’s export sector, giving authorities another reason to accept the currency’s current decline. Notably, the lack of a bilateral currency swap agreement is a significant detail. This removes a key stabilization tool used during the financial crises of 2008 and 2020. Without this safety net, any sudden global downturn could lead to a sharper depreciation in the won than previously experienced. This makes it important to have protective measures in place against a substantial drop in the won. Create your live VT Markets account and start trading now.

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