A Yen Rally May Hold Key to Emerging Asian Laggard Won’s Rebound

A sustained yen appreciation is likely to bode well for the South Korean won, emerging Asia’s worst-performing currency this quarter, with moves between the two most closely in sync in nearly two decades.

China’s yuan is generally seen as the for Asian currencies but the won’s correlation with the yen has been higher. The won-yen correlation has surged to the most since 2007 — the highest among Asian pairs — as the currencies show heightened sensitivity to US rates and shifting global risk sentiment.

“The won exhibits a higher beta to yen compared to the yuan,” said Rohit Garg , a strategist at Citigroup Inc., referring to responsiveness of the currency pairs. “When both yen and yuan are moving in the same direction, that will have an outsized impact on the won.”

The won’s correlation to the yen has risen to 0.55 in the past week, based on weekly data over the past five years, with a gauge of 1 indicating both assets move in lockstep. The same measure for the won and yuan stood at 0.48.

The recent performance of these currencies underscores the correlation.

The won has weakened more than 4% to 1,468.9 per dollar so far this quarter as increased by local funds pressured the currency, prompting verbal intervention from local authorities. However, easing tensions between US and China have bolstered the yuan to a one-year high versus the dollar.

Now investors are looking for the yen to extend its advance after it bounced off a 10-month low last week as it could in turn support the won. For Woori Bank, the yen’s trajectory is now tied to a rare scenario: monetary policy convergence in the US and Japan.

“Expectations for a Bank of Japan rate hike underpin forecasts for a decline in the dollar-yen rate, and if this coincides with Federal Reserve rate cuts, it would add to the upward pressure on the yen,” said Gyeong-Won Min , an economist at the bank. The won is likely to follow the yen if it strengthens, he said.