Exclusive-S.Korea pension fund recently selling dollars in forex market, sources say

By Yena Park and Jihoon Lee

SEOUL (Reuters) – South Korea’s pension fund has been selling dollars in the onshore foreign exchange market in recent weeks, capping losses in the won currency as the dollar surges, two sources with knowledge of the matter told Reuters.

The National Pension Service (NPS), the world’s third-largest public pension fund with more than $810 billion in assets, is a major mover of domestic financial markets.

“The pension fund is selling dollars in the spot market lately,” one source said. “It is seen related to tactical FX hedging or portfolio rebalancing.”

Another source said the dollar selling this month was likely for portfolio rebalancing purposes.

“The pension fund has to sell if the ratio of foreign assets surpasses the target,” the person said. The NPS sold “quite an amount” of dollars, they added, without providing further detail.

The two sources asked not to be identified due to sensitivity of the matter. The NPS, which typically does not reveal its market-moving investment strategies, declined to comment.

The pension fund had until recently been a source of downward pressure on the won for years as it boosted its overseas investments, with estimated outflows of $2-3 billion each month.

Its dollar selling comes as the won currency is trading around the psychological threshold of 1,400 per dollar, breaching that level earlier this month for the first time in two years. The dollar has gained strongly across the board since Donald Trump’s victory in the U.S. presidential election.

The won, last quoted 1,396.1 per dollar, has weakened 8% so far in 2024, extending losses for the fourth consecutive year.

LOCAL STOCKS UNDERPERFORMING

Earlier this month, the benchmark index dropped to its lowest level in a year, despite a record-high rally in U.S. stocks. It has fallen 5% so far this year, while the has gained 26%.

According to the latest disclosure, the NPS held 13.2% of its assets in domestic stocks and 34.2% in foreign stocks at the end of August, compared with its year-end targets of 15.4% and 33.0%, respectively.

The pension fund, combined with other smaller ones, has bought KOSPI shares worth 1.9 trillion won ($1.36 billion) so far in November, its biggest purchases since March 2020, according to Korea Exchange data.

The NPS hedges up to 5% of its overseas assets if it sees a need to manage foreign exchange risk. It holds assets worth 1,140.1 trillion won, with 55% of the total abroad. It plans to raise the ratio to 60% by 2026 for higher returns, as part of efforts to delay the depletion of the funds amid a fast-ageing population.

The NPS and the central bank are currently discussing whether they should extend and expand again their $50 billion foreign exchange swap line, which analysts say is a symbolic market stabilising tool and is set to expire at the end of the year.

($1 = 1,395.0500 won)