When Currency Trumps Stocks: The Won Moved More Than the Market

On September 29 the S&P 500 closed at 7,670.8398, down 0.17%. The Nasdaq 100 went the other way, up 0.21% to 30,339.332. The VIX finished at 16.04, a touch lower. If you measure your portfolio in dollars, there is not much to say about a day like that.

I do not measure it in dollars. On the same date the won’s reference rate against the dollar moved from 1,352 to 1,360, a 0.59% weakening of the won. That move was more than three times the size of the S&P’s, and it pointed in the opposite direction for anyone holding US assets from here.

What the Day Looked Like in Won

For a Seoul-based holder of an S&P 500 fund, the currency more than covered the index’s loss. The shares were worth slightly less in dollars, but each dollar was worth more in won, and the second effect was larger. A Nasdaq 100 holder got both effects in the same direction. Nobody would call it a good day on the market, yet in won terms it was a positive one for most US holdings.

This is the part a dollar-based reader never sees. I have written a few of these daily notes now, and the pattern keeps returning: the index gets the headline, and the exchange rate decides what actually showed up in my account. On quiet days that is even more true, because a small index move leaves the currency with nothing to compete against.

The Dollar Explains Only Part of It

The obvious first answer is a stronger dollar. The US Dollar Index did rise, closing at 101.408, up 0.21%. The 10-year Treasury yield added 1.5bp to 5.26%. Higher US yields and a firmer dollar usually lean on the won. But these particular moves happened in the New York session, after the won’s rate for the day had already been set in Seoul, so they cannot be what moved it. When the dollar is up and the won is down, that is often the whole story, as in an earlier note I wrote up as Dollar Up, Won Down.

But the won weakened by 0.59% while the dollar index rose by 0.21%. The won fell further than the broad dollar move would suggest on its own. Nor was there a risk-off tone to point to: the VIX slipped, and the Nasdaq rose. The usual story, where global nerves send money out of emerging-market currencies, does not fit a day when fear gauges were drifting lower.

Looking Closer to Home

That leaves causes on the Korean side. It could be flows: importers buying dollars, or local investors sending money abroad to buy exactly the kind of US assets I hold. It could be expectations about policy. The latest Bank of Korea base rate in my data is 3.00%, dated September 27, and nothing in that data shows a change. A US 10-year yield above 5% against a Korean policy rate of 3.00% is a wide gap, and it weighs on the won, but that gap did not appear yesterday.

I will be honest that I do not know which of these it was. One day of data cannot separate them, and I would rather leave the question open than attach a neat cause to a number that does not come with one.

Two Clocks, One Comparison

There is one more thing worth keeping in mind. The won’s reference rate is a Seoul-hours number. The S&P close happens on New York’s clock, which is night here. That means the won’s rate for September 29 was set before that day’s New York session opened, and it cannot reflect anything that happened in that session. Putting the two side by side under the same date is convenient, and I do it, but they do not describe the same hours. What looks like the won moving independently of the US market may simply be the won reacting to things that happened before the US market opened.

That is part of what it means to hold US assets from Korea. The two numbers that decide my return are set in different time zones, and I read them together the next morning as if they were one event.

What I Take From It

A day like this one does not ask me to do anything, and I did nothing. What it does is remind me where the variance in my returns actually lives. On a day the S&P barely moved, most of what changed in my account came from the currency, and the currency moved for reasons the US market data could not show me.

KRW/USD reference rate and base rate data from the Bank of Korea’s Economic Statistics System (ECOS).