If geopolitical risk eases, then the USDKRW is expected to trade below the 1,500 level. Also, we expect the Bank of Korea to move ahead of the Federal Reserve, with a narrowing policy rate gap likely to support the KRW. Thus, the USDKRW is expected to go down to around 1,450.
Considering the larger current account surplus and narrowing the yield gap, 1,450 is still far weaker than the long-term average. We believe there are factors that limit further KRW gain.
Last week, the National Pension Service (NPS) decided to raise the target allocation for domestic equity from the current 14.9% to 20.8%. This was largely in line with our estimation of 19.9%. Also, NPS decided to widen the Strategic Asset Allocation (SAA) buffer range to respond to market volatilities. It decided not to disclose the size of the buffer. This will give more flexibility in managing the portfolio to the NPS. As such, the NPS is not likely to reduce its domestic equity weight aggressively in the near term. However, this implies that the allocation to assets other than domestic equity must be increased.
Under this year’s plan, foreign equity allocation increased to 35.6% (from 34.7%), and domestic bond allocation was reduced to 21.8% (from 23.1%). Although the NPS has increased its FX hedge ratio, it is unlikely to fully hedge its overseas investments, so further investment in foreign asset markets should continue to put pressure on KRW, in our view.
Not only portfolio investment but also direct investment to overseas will increase. As part of the Korea-US trade negotiations, provisions on direct investment in the US will be finalised in the second half of 2026. It’s expected that investment by Korean companies in the US will increase for an extended period.
For these reasons, despite a strong increase in the trade surplus and the outperformance of KOSPI, we expect USDKRW to remain above 1,450 by the end of 2026.
