The dollar-won rate jumped to around 1,346 won by 12:30 p.m. after falling into the 1,336 range earlier in the session, reversing by roughly 10 won from its intraday low.
Reuters reported shortly before noon, citing a market source, that the NPS had suspended foreign-exchange hedging operations.
The report abruptly shifted sentiment in a market where expectations of continued dollar selling by the pension fund had contributed to the won's rapid appreciation.
The won had strengthened sharply earlier Monday despite stronger-than-expected U.S. employment data that increased expectations of another Federal Reserve interest rate hike.
The dollar-won rate opened at 1,347.8 won and fell to 1,338.5 won around 9:30 a.m. before extending its decline into the 1,330 range for the first time in nearly 23 months.
Exporter dollar selling and large foreign-currency inflows linked to the semiconductor sector had driven the won's recent rally even as external conditions turned less favorable.
Currency hedging by the NPS typically involves selling dollars forward to reduce foreign-exchange exposure on its overseas assets.
Related transactions by counterparties can increase dollar supply in the domestic foreign-exchange market. Suspending the activity could therefore remove an important source of expected dollar selling and put the brakes on further won appreciation.
The NPS stepped up foreign-exchange hedging in June when the won weakened beyond 1,560 per dollar to its lowest level in 17 years.
Dollar selling linked to the pension fund helped support the currency's subsequent recovery, with the dollar-won rate falling 22.9 won to close at 1,512.1 on June 9.
The National Pension Fund Management Committee in April set the strategic hedging ratio for overseas investments at a baseline of 15 percent while allowing the fund to adjust its implementation flexibly depending on market conditions.
The framework gives the NPS room to reduce hedging when the won strengthens rapidly as well as increase it during periods of excessive currency weakness.
The size of the NPS' outstanding hedging positions, the timing of the suspension and whether expiring positions would be rolled over were not immediately disclosed.
AJP Takeaways
Reuters reported that the NPS had suspended foreign exchange hedging, prompting the won to reverse much of its earlier gain.
National Pension Service hedging can add dollar supply to the domestic foreign exchange market through forward transactions and related counterparty flows.
National Pension Fund Management Committee policy still allowed a 15 percent baseline hedging ratio to be implemented flexibly depending on market conditions.
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