The 24-hour foreign exchange market is set to begin operations. There are expectations that absorbing offshore non-deliverable forward (NDF) trading into the domestic market will reduce currency fluctuations, but concerns about increased volatility due to low liquidity during nighttime trading persist.
According to the Seoul foreign exchange market on July 2, trading hours will transition to a 24-hour continuous system starting July 6. This change allows for won-dollar transactions every day except weekends and January 1.
The opening of the foreign exchange market around the clock is anticipated to absorb offshore NDF trading. NDF transactions settle the difference between a predetermined exchange rate and the actual rate at maturity in designated currencies, such as dollars, without exchanging actual won overseas.
The government has identified NDF trading as a significant factor contributing to currency fluctuations. When bets against the won are placed overseas overnight, the domestic market often opens with a lower actual value of the won. After the Seoul market closes, if the exchange rate rises in the New York NDF market, domestic investors tend to interpret this as a leading indicator for the next trading day's exchange rate increase. Shin Hyun-sung, the governor of the Bank of Korea, has referred to this phenomenon as 'the tail wagging the dog.'
The extension of trading hours is expected to mitigate these negative factors. In July 2024, the Seoul foreign exchange market significantly extended its trading hours from 3:30 PM to 2 AM. This change has been credited with reducing gap risk by allowing real-time reflection of overseas events during the night. According to the Capital Market Research Institute, the average gap volatility before the extension was 0.306%, fluctuating between 0.2% and 0.5%. After the extension, it dropped to an average of 0.145%, moving within a range of 0.1% to 0.2%.
However, some analysts have raised concerns about increased volatility due to low trading volumes during nighttime hours. Morgan Stanley Capital International (MSCI) noted in its annual market classification review last month that while trading hours have been extended to 2 AM, nighttime trading volumes are still insufficient, and bid-ask spreads are not as tight as in developed currency markets.
According to Hanwha Investment & Securities, volatility in the foreign exchange market has increased by 30.4% during nighttime hours since the extension. Researcher Choi Kyu-ho stated, "Since the foreign exchange market opened 24 hours, the average gap between quarterly high and low exchange rates (103.1 won) could widen by 20%, leading to a won-dollar exchange rate band of 120 won. This indicates ongoing liquidity issues with widening bid-ask spreads and thin order volumes."
As the won-dollar exchange rate remains high in the 1550 won range, some analysts believe that the 24-hour opening will not change the direction of the exchange rate. The current rate is significantly influenced by foreign inflows. In the stock market, rising prices have led to profit-taking and rebalancing by foreign investors. As of the previous day, foreign investors had net sold 150.7476 trillion won in the securities market this year.
Wi Jae-hyun, a researcher at Kyobo Securities, noted, "The primary factor driving the rise in the exchange rate appears to be the rebalancing sales by overseas passive funds. Given the relative returns in the global stock market, it is likely that these rebalancing sales will continue for the time being. If rebalancing sales persist in the second half of the year, there may be no factors to prevent the upper limit, and we need to keep the upper limit for the third quarter open to 1600 won."
* This article has been translated by AI.
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