Inflows from SK hynix's (000660.KS) American Depositary Receipt (ADR) issuance and the possibility of forward currency sales emerged as key variables behind the sharp fall in the won-dollar exchange rate on Wednesday.
A senior foreign exchange authority official said in a phone call with Seoul Economic Daily that day that "there is a possibility that some SK hynix-related volume has come out or been pre-reflected in the market." He explained, "Nearly $30 billion won't come into the spot market all at once, but from a corporate perspective, there is a possibility of selling forward contracts in installments before the funds flow in," adding, "Wednesday's exchange rate decline can also be seen as partly the effect of some volume being released or pre-reflected."
The market read the official's remarks as effectively acknowledging the possibility that some forward-sale volume from SK hynix had been released. While some in the market had initially raised the possibility of actual intervention by the foreign exchange authorities, greater weight is being given to the interpretation that expectations of SK hynix ADR fund inflows and the possibility of forward sales, rather than actual dollar-selling intervention, triggered the unwinding of dollar long positions.
The won-dollar exchange rate closed daytime trading at 1,525.60 won, down 30.20 won from the previous session. After opening at 1,544.50 won, down 11.30 won from the prior close, the rate fluctuated in the 1,540-won range during the session before widening its losses around 3 p.m. as reports of SK hynix ADR fund inflows emerged.
Earlier, Bloomberg, citing sources, reported that SK hynix plans to bring about $29 billion, roughly 45 trillion won, into the country on the 15th, the day after the scheduled payment date for the ADR issuance. The funds are set to be used for domestic investment, including the construction of semiconductor facilities in Yongin and Cheongju, which could generate substantial demand to convert into won. The $29 billion exceeds the average daily trading volume of the spot foreign exchange market.
What the market focused on is the possibility of forward sales before the funds actually flow in. For SK hynix, if the exchange rate falls further before the 15th, there is a risk that the amount received when converting dollars into won would decrease. To avoid this, there is an incentive to carry out forward sales in installments, selling the dollars it is due to receive in advance at a predetermined rate.
Forward sales also ripple into the spot foreign exchange market. This is because a bank that takes on the forward contract may sell dollars in advance in the spot market to reduce its excess dollar position, or hedge in the swap market. In this case, dollar-selling pressure could form even before the actual ADR funds enter the country, acting as a factor that pulls down the won-dollar exchange rate.
