The Korean export sector is on the rise, especially in semiconductors. However, the Korean won (KRW) has fallen due to large foreign equity outflows and worries about AI valuations. The Bank of Korea seems to have finished its cycle of lowering rates. Even though the economy is improving, the KRW is still unpredictable. This week, the currency dropped by 2% against the US dollar, affected by a large foreign equity outflow of USD 5.3 billion.

Market Reactions

As a result, the KOSPI index declined by 2.7%, ending the week at the 5100 level. Forecasts indicate that the USD/KRW rate may gradually decline through 2026. In general, trading for the KRW is likely to remain unstable. Current market conditions are shaped by both local economic factors and global concerns about AI and financial stability. The high volatility seen in the USD/KRW last year continues into early 2026. Although the exchange rate has dropped to around 1,320 as some predicted, large daily fluctuations are still common. This instability arises from strong exports struggling against unpredictable foreign capital movements. Looking back at 2025’s equity outflows, the situation remains uncertain, contributing to the won’s weakness. Despite the KOSPI bouncing back to the 2,850 level, foreign sentiment can change quickly based on global tech valuations. For example, after experiencing net outflows late last year, we saw a rebound with over $4 billion in net foreign inflows into Korean stocks this past January, illustrating the market’s dual risk.

Economic Fundamentals

The Korean economy is fundamentally strong, driven by a growing semiconductor supercycle. Recent trade data from January 2026 revealed that exports rose over 18% year-on-year, marking the fourth consecutive month of growth. This ongoing strength should, in theory, support a stronger won in the long run. As we expected throughout 2025, the Bank of Korea’s cycle of rate cuts seems to be over. The policy rate has remained at 3.50% for several meetings, as the central bank focuses on risks to financial stability and inflation. While this removes a major obstacle for the won, external factors can still cause volatility. With elevated implied volatility in the won, traders might want to consider strategies that take advantage of this environment. Selling short-dated option strangles on USD/KRW could be a good way to collect premiums from the expected choppy, range-bound trading. For those who believe in the long-term strength of the won, purchasing longer-dated USD/KRW put options allows positioning for a gradual decline while limiting risk from short-term spikes. Create your live VT Markets account and start trading now.

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