South Korea's foreign exchange swap points surged into positive territory across all tenors on the previous trading day, marking the first time the 1-month tenor closed in positive range since June 2, 2022. The 1-month FX swap point closed at +0.20 won at Seoul Foreign Exchange Brokerage and +0.10 won at Korea Money Brokerage, according to Yonhap Infomax Excel data. Market participants attribute the surge to SK Hynix's American Depositary Receipt funding and increased export negotiation volume supplying dollar liquidity, but dealers emphasize these factors alone cannot explain the heightened volatility. The imbalance stems from institutional disparities in won liquidity, with securities firms holding surplus funds while foreign banks face shortages, preventing efficient capital circulation in the money market.
FX Swap Points Record First Positive Close in Four Years
The 1-month FX swap point closed at +0.20 won at Seoul Foreign Exchange Brokerage and +0.10 won at Korea Money Brokerage on the previous trading day, according to Yonhap Infomax Excel connection data. This marked the first positive close for the 1-month tenor since June 2, 2022, approximately 4 years and 2 months ago.
Short-term tenors showed widespread strength on the same day. The 1-week tenor traded at +0.30 won, while ultra-short tenors overnight (O/N) and tomorrow-next (T/N) quoted at +0.080 won and +0.010 won respectively. The strength in short-term instruments spread across all tenors.
Dealers Cite Won Liquidity Imbalance as Primary Driver
Market participants identified SK Hynix ADR-related funding and export negotiation volume as factors contributing to abundant dollar liquidity. However, a swap dealer at Foreign Bank A stated, "While dollar liquidity has increased significantly recently, the dollar is a global currency and can flow out somewhere if abundant. It's difficult to explain the current movement solely through SK Hynix's dollar supply."
The dealer emphasized won market distortions as the larger issue: "Won is surplus in some areas and insufficient in others, but the bigger problem is that funds are not circulating well. Securities firms appear to have won surplus, but foreign banks are facing shortages."
The dealer estimated the impact distribution as "70% from won market distortions and 30% from SK Hynix influence," noting imbalances where "won is surplus in the repo market but insufficient in the call market."
A swap dealer at Bank B described the previous day's trading: "Bids were really strong. There weren't many offer transactions, and overall all tenors were being lifted." The dealer added, "There were won shorts on the short end, and the reserve requirement day is not far off. As short-term instruments rose significantly, long-term instruments were also affected, and I think there's potential for further increases."
A swap dealer at Bank C diagnosed the situation: "In the first half, there was a strong tendency for swaps to become biddy ahead of month-end, and this combined with strong factors as large negotiation volumes including SK Hynix emerged." The dealer explained, "When spot rises, negotiation volumes emerge again, and the flow of dollar buying offshore can repeat. Once supply-demand distortion occurs this way, it's not easily resolved."
Market Volatility Raises Concerns Over Market-Making Activity
The issue centers on short-term instruments deviating significantly from theoretical prices despite the absence of special settlement dates like quarter-end or half-year-end. At the end of the previous month, FX swap ultra-short tenors also surged due to supply-demand imbalances in the foreign currency funding market. On the 29th of the previous month, T/N closed at +0.60 won at both brokerage firms, and the following day O/N temporarily exceeded +1.00 won.
That incident was interpreted as won funding demand concentrating at securities firms and foreign banks as half-year-end and quarter-end overlapped. Ultra-short tenor prices appeared to stabilize quickly as the calendar turned to July.
The Foreign Bank A dealer pointed out, "It's rare to see such volatility in short-term instruments in global markets when it's not a special settlement date. When the overnight rate foundation shakes, participants making markets in term instruments cannot gauge appropriate prices."
Concerns exist that increased price volatility in ultra-short tenors could create a vicious cycle where dealers become reluctant to actively quote term instruments, leading to thinner market liquidity and expanded volatility.
Some critics argue that the Bank of Korea's won liquidity management has failed to sufficiently resolve institutional funding supply-demand imbalances, affecting the FX swap market. The Bank C dealer stated, "This level of volatility is not normal. The market is distorted, and it appears buyers are either misjudging something or buying at high prices because they have no choice."
The dealer added, "Particularly in Asia, dollars are not scarce, so the strong trend doesn't seem likely to be easily resolved. Last month, ultra-short tenors traded at high levels and were settled in one day, but since swap distortions are not easily resolved, we must leave open the possibility of additional increases."
FAQ
What caused South Korea's FX swap points to turn positive?
South Korea's FX swap points turned positive due to a combination of SK Hynix's ADR funding, increased export negotiation volume supplying dollar liquidity, and institutional imbalances in won liquidity. Dealers noted that securities firms hold surplus won while foreign banks face shortages, preventing efficient capital circulation.
When did the 1-month FX swap point last close in positive territory before this occurrence?
The 1-month FX swap point last closed in positive territory on June 2, 2022, approximately 4 years and 2 months before the recent positive close at +0.20 won (Seoul Foreign Exchange Brokerage) and +0.10 won (Korea Money Brokerage).
How does FX swap volatility affect market-making activity?
Increased volatility in ultra-short tenor FX swaps makes it difficult for dealers to gauge appropriate prices for term instruments, potentially causing them to become reluctant to actively quote prices. This can lead to thinner market liquidity and create a vicious cycle of expanded volatility, according to dealers interviewed.
