Forex Veteran Suggests Paring Korean Won Against Thai Baht, Citing ‘Polar Opposite’ Fundamentals
A seasoned foreign exchange strategist suggests investors consider a long position on the Korean won against the Thai baht, highlighting the won’s undervaluation and the baht’s overvaluation based on contrasting economic fundamentals.
Prior to recent geopolitical events, the Korean equity market experienced significant growth, with the Kospi index reaching levels unseen in years, nearly doubling from the previous year.
Despite this stock market rally, the Korean won has remained relatively weak against the US dollar, trading in the mid-1,400 won range. This suggests an undervalued exchange rate, even with the strong performance of Korean equities.
The won’s weakness has been largely attributed to capital outflows, particularly due to Korean residents investing in US equities. However, Yan Wang, Chief Emerging Markets Strategist at Alpine Macro, believes these capital flows are likely to reverse.
With over two decades of experience in financial research, Wang specializes in emerging markets and currency analysis.
Wang notes that historically, periods of strong Korean equity outperformance have been followed by a moderation or reversal of capital outflows, although with a time lag.
“Looking back at prior cycles, the lag has typically ranged between three to nine months. Retail investors tend to chase performance only after it becomes durable. For institutional investors, asset allocation changes are also slow-moving,” he explained in an email to The Korea Herald.
While ongoing geopolitical tensions in the Middle East may create short-term volatility for the won, Wang believes the conflict’s impact will likely diminish. He anticipates the won to appreciate as capital flows stabilize and the economic momentum becomes more evident.
“Typically FX markets react later than equities in early cycles. Equities discount growth acceleration earlier than currencies. FX markets require confirmation via hard data, flow reversal and clear cyclical momentum,” Wang stated.
“Exports are booming, but production has not fully responded due to prolonged destocking. The currency typically reacts more strongly once industrial production accelerates, growth data visibly turns higher and the restocking cycle becomes undeniable.”
Considering these factors, Wang suggests investors may benefit from taking a long position in the Korean won against the Thai baht, which he identifies as one of the most overvalued emerging-market currencies in real effective terms.
“The fundamentals of the Thai baht are, in many respects, the polar opposite of those of the Korean won,” Wang explained, emphasizing the baht’s high valuation relative to Thailand’s terms of trade, a situation contrasting with Korea’s.
The overvalued baht may hinder Thailand’s economic sustainability, increasing the probability of its decline, he added.
In contrast, the Korean won is trading at levels usually associated with financial crises, despite the absence of underlying crisis-level fundamentals, indicating a significant undervaluation.
“The bottom line is that we believe the Korean won is materially mispriced,” Wang concluded.
“External fundamentals are strong, cyclical momentum is improving, and the capital flow headwinds that weighed on the currency are likely to reverse.”
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