USD\/KRW fell 0.7% to 1,444, its lowest level since 27 February, after South Korean authorities moved to rein in leveraged ETFs in an effort to curb Kospi volatility. Following an emergency meeting, the Finance Ministry set out plans to limit retail participation by capping portfolio exposure to leveraged products and lifting trading costs. These steps extend measures announced in mid-July, which included suspending new leveraged ETF listings and raising the minimum account balance for buying existing products to KRW30mn from KRW10mn.<\/p>\n
The won also drew support from expectations of further Bank of Korea policy tightening and from export earnings repatriation flows. BoK Governor Shin Hyun-sung told a parliamentary committee that tighter monetary policy may be needed as inflationary pressures build. USD\/KRW has declined 7.3% since 1 July, even as domestic equities recorded sharp losses and the Finance Ministry came under political scrutiny over whether single-stock leveraged ETFs amplified recent volatility.<\/p>\n
We recommend that derivative traders position for further downside in the USD\/KRW pair in the coming weeks by utilizing short futures or buying KRW call options. The currency pair has recently dropped 7.3% to 1,444, and this downward momentum is highly likely to continue as export revenues flood back into the local market. With South Korea\u2019s recent trade data showing a strong surplus driven by global technology demand, the fundamental support for the Won remains incredibly strong.<\/p>\n
We also suggest traders look at interest rate swaps to price in further monetary tightening from the Bank of Korea. Governor Shin Hyun-sung\u2019s hawkish stance on sticky inflation suggests the central bank is prepared to push its benchmark interest rate higher. Historically, when the Bank of Korea hikes rates to combat inflation, short-term bond yields spike, making paid position swaps highly profitable.<\/p>\n
In the equity derivatives space, traders should prepare for declining Kospi volatility as regulators aggressively curb retail leveraged ETFs. The new mandate raising the minimum entry barrier to 30 million Won will likely drain speculative liquidity from the market. Consequently, we expect Kospi options implied volatility to drop, making short-volatility strategies highly attractive right now.<\/p>\n\n\n\n