● National Pension FX Hedge, Government Currency War, Won Squeeze
Will the National Pension Service’s FX Hedging Actually Stabilize the KRW–USD Exchange Rate? A Single-Pass Brief Including the “Decisive Pivot Point” Through 2026
This report focuses on three points:
- (1) What “FX hedging” is and why the National Pension Service (NPS) is deploying it now.
- (2) Why the government’s “fight against the exchange rate” can have short-term impact but limited durability.
- (3) Underreported variables: structural solutions and the signals the market is pricing.
1) Issue Snapshot (One-Line)
The government and the Bank of Korea (BOK) have delivered strong guidance that “excessive KRW weakness is undesirable,” while mobilizing tools such as NPS FX hedging and FX swaps to suppress the KRW–USD rate in the near term.
However, it is necessary to distinguish between (i) structural measures that lower the equilibrium level and (ii) short-term measures consistent with year-end level management.
2) FX Hedging: A Practical Definition as “Insurance That Locks the Exchange Rate”
2-1. What “hedging” means
Hedging is a mechanism to mitigate risk.
FX hedging removes exchange-rate variability from investment outcomes, leaving returns primarily driven by underlying asset performance.
2-2. Unhedged vs. hedged FX exposure: who bears FX gains/losses
For USD-denominated assets (e.g., US equities), KRW depreciation increases KRW returns via FX gains, while KRW appreciation creates FX losses.
FX hedging largely neutralizes these FX gains/losses so that performance is driven mainly by asset price moves.
2-3. ETF analogy
For similar US index ETFs, an “H” in the name typically indicates an FX-hedged share class.
During periods of USD strength, unhedged exposure generally outperforms in KRW terms; if the USD weakens, hedged exposure can provide relative protection.
3) Two Primary Channels Through Which NPS FX Hedging Can Operate
3-1. FX forwards: pre-agreeing an exchange rate
If NPS buys USD in the spot market to purchase foreign assets, it can add to spot USD demand and push the KRW–USD rate higher.
Using FX forwards can reduce immediate spot-market pressure by shifting settlement to a future date at a pre-agreed rate.
3-2. FX swaps with the BOK: sourcing USD from the central bank rather than the market
If NPS obtains USD via FX swaps with the BOK instead of buying in the spot market, spot USD demand can decline.
This is positioned as an “FX supply-demand stabilization” tool.
4) The “Exchange-Rate War” Toolkit: Predominantly Supply–Demand Measures
4-1. Common feature
Current measures largely treat the exchange-rate move as a USD supply–demand imbalance and attempt to reduce USD demand or increase USD supply.
These are best characterized as tactical stabilization actions rather than structural reforms.
4-2. Three representative measures
(1) Incentivize a shift from overseas equities to domestic equities (tax benefits)
Encourage investors to sell foreign equities, convert proceeds into KRW, and invest domestically for a specified period in exchange for tax benefits.
Objective: reduce USD demand and increase domestic capital circulation.
(2) NPS FX hedging task force + higher hedge ratio (up to ~10%, etc.)
Given the scale of NPS foreign assets, even incremental increases in hedge ratios can affect market FX flows.
(3) Encourage repatriation of corporates’ overseas USD balances (e.g., dividend tax adjustments)
Incentivize inbound dividend flows from foreign subsidiaries to increase USD supply domestically.
5) Key Assessment: Why This Is Not a Durable Long-Term Remedy
5-1. Flow-based measures often generate “reversion” over time
Markets ultimately price fundamentals (rates, liquidity, growth, and risk premia).
Even if FX operations suppress the rate by 50–80 KRW in the short run, the absence of fundamental change can lead to renewed upward pressure later.
5-2. Core structural drivers: rate differentials + liquidity (money supply) + growth expectations
A persistent US–Korea rate differential and domestic liquidity dynamics influence the exchange-rate level.
Markets also price the probability of a Federal Reserve pivot and Korea’s fiscal/liquidity trajectory, which feed into inflation expectations and rate paths, and then into FX.
6) Forward Watchlist (Market Checkpoints)
6-1. Short term (year-end to Q1): guidance + intervention + level management
Authorities typically have stronger incentives to manage levels into year-end.
Volatility may rise, while directionality can be capped by intervention credibility.
6-2. Medium term (2026): KRW relief if US policy turns more accommodative
A scenario referenced in public commentary is a move toward the mid-1,350s by late 2026, contingent on US rate cuts and a faster liquidity expansion.
This is linked to global growth outcomes (soft landing vs. recession) and the US Treasury market backdrop.
6-3. Long term: “investment destination” dynamics can reset the FX level
Structural FX stability requires not only limiting USD outflows but also creating durable USD inflows.
Higher foreign direct investment (FDI) inflows—supported by reforms across regulation, labor markets, and R&D—are central to long-run exchange-rate level outcomes.
7) Underemphasized but Material Points
7-1. FX hedging is primarily a risk/return management tool, not a patriotic policy lever
For NPS, the primary objective can be reducing volatility and improving funding stability rather than targeting the exchange rate.
If hedging is increased during further KRW depreciation, foregone FX gains can create performance optics risk and trigger governance scrutiny.
7-2. Markets price sustainability, not announcements
Temporary suppression is feasible; sustaining the level after interventions taper is materially harder.
Without improvements in growth expectations, fiscal trajectory, and rate dynamics, the exchange rate often reverts toward its prior trend.
7-3. If FX stability improves, the next-order issue is domestic equity valuation and capital flows
A stronger KRW can reduce import-price pressure and ease inflation, indirectly reducing rate burdens.
It can also affect exporter earnings expectations, foreign investors’ return assumptions, and domestic asset re-rating dynamics.
FX is a hub variable influencing equities, fixed income, and the real economy.
8) Practical Checklist for Investors and Professionals
- If the KRW–USD rate is expected to decline: reassess whether USD assets should be hedged.
- If renewed upside risk is expected: monitor whether suppressed levels trigger a rebound in USD demand.
- If Korea’s structural competitiveness improves: track FDI inflows, industrial policy execution, and AI infrastructure expansion as potential drivers of a lower long-run FX level.
< Summary >
FX hedging functions as “insurance” that reduces exchange-rate variability; if NPS increases hedging, near-term FX supply-demand conditions can tighten in a way that suppresses the KRW–USD rate.
However, most current measures are flow-based, and without shifts in rate differentials, liquidity, and growth expectations, the exchange rate can revert.
Sustained FX stability is more closely tied to structural inflow capacity—especially higher FDI and broader economic competitiveness reforms that increase durable USD inflows.
[Related…]
- Exchange rate outlook: key checkpoints during elevated KRW–USD volatility
https://NextGenInsight.net?s=exchange%20rate - How shifts in NPS strategy affect financial markets
https://NextGenInsight.net?s=National%20Pension%20Service
*Source: [ 경제 읽어주는 남자(김광석TV) ]
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