The impact was about four times greater overnight than during Seoul trading hours, when deeper liquidity and a broader range of transactions diluted the effect of NDF flows.
The Bank of Korea on Tuesday released estimates of the impact of NDF trading on the dollar-won exchange rate, based on a vector autoregression model that accounted for factors including interest-rate differentials and broad movements in the US dollar.
Since the beginning of 2024, foreign investors’ net NDF purchases were estimated to have lifted the dollar-won rate by an average of about 2 won a month, with every $100 million in net purchases adding roughly 0.1 won.
In March, the transactions added an estimated 26 won to the dollar-won rate, equivalent to 33 per cent of the currency pair’s 79-won monthly increase.
In May, they contributed about 7 won, or 26 per cent of that month’s 27-won rise.
Foreign investors’ net NDF purchases reached $53.9 billion in the first half of the year, the largest amount recorded for any six-month period.
NDFs allow investors to agree on a future exchange rate without exchanging the underlying currencies, with only the difference between the contracted and settlement rates paid in dollars at maturity.
Although the contracts are settled offshore, they can affect the domestic spot market when financial institutions hedge their exposure, with large NDF purchases by investors betting on a weaker won generating additional dollar demand and placing upward pressure on the exchange rate.
Governor Shin Hyun-song had previously identified the same transmission mechanism as a factor behind the won’s weakness, describing it at his April confirmation hearing as a case in which “the tail wags the dog” and explaining at a May press conference that offshore positions could spill into the domestic market through financial institutions’ hedging.
Across the 10 months with the largest NDF net purchases since 2024, the trades added an average of about 12 won to the exchange rate overnight, compared with roughly 3 won during daytime trading.
Global developments were typically priced first through offshore NDFs while the Seoul market was closed, with thinner volumes and lower liquidity magnifying their impact, while deeper daytime liquidity and simultaneous activity in spot and other foreign-exchange markets reduced their influence.
The BOK said Korea’s shift to round-the-clock foreign-exchange trading on July 6 could draw won transactions away from the offshore NDF market by allowing global developments to be reflected in onshore dollar-won trading in real time.
The central bank cautioned that NDFs were only one of several forces driving the exchange rate, alongside the global dollar, interest-rate differentials, cross-border capital flows and market sentiment.
A gradual shift towards onshore spot and deliverable forward transactions could deepen the market, improve transparency and reduce the extent to which concentrated offshore positions amplify short-term movements in the won, the BOK said.
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