South Korea Economics: FX Policy Implications of NPS FX Hedging and Shareholder Return Program

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20 Aug 2026 02:50:23 ET │ 11 pages

South Korea Economics

FX Policy Implications of NPS FX Hedging and Shareholder Return

Program

CITI'S TAKE

[1] In August, broad capital outflow pressure has moderated thanks to

foreign equity investors. [2] In our view, the NPS could stop raising the FX

hedging ratio if USDKRW remains below around 1,390 levels. Separately,

the NPS could gradually resume purchasing US dollar from the spot

market in 2H26. However, the size and timing would be highly

uncertain. We believe that the Korean FX authorities would prefer

USDKRW levels at or below 1350 levels. Both the Korean FX authorities

and the NPS may actively coordinate depending on FX market situation, if

necessary. [3] Enhanced shareholder return program of Korean memory

chip makers should be net positive for KRW as it would keep the FX

conversion ratio (USD to KRW) of exports higher. Roughly speaking, half of

the shareholder return program could be converted back to USD if foreign

equity investors repatriate funds.

Jin-Wook KimAC

[1] In August, broad capital outflow pressure has moderated thanks to foreign

equity investors. Capital outflow pressure from foreign equity investors moderated

to -US$3.3bn during August 1st-19th (vs July: -US$6.2bn; June: -US$30.5bn; May: US$27.9bn). Meanwhile, Korean retail investors' purchase of foreign securities reaccelerated to US$3.1bn during August 1st-19th (vs. July: US$6.7bn, average JuneMarch: +US$0.7bn; average January-February: +US$5.5bn).

[2] In our view, the NPS could stop raising the FX hedging ratio if USDKRW

remains below around 1,390 levels. The NPS FX hedging has been gradually

implemented via BoK/NPS FX swaps since December’25, in our estimates. On April

14th, the Fund Management Committee of the National Pension Service (NPS)

decided to raise the baseline FX hedging ratio for overseas investments to 15%. In

practice, the NPS could slowly raise the FX hedge ratio while flexibly adjusting the FX

hedge ratio in two ways, in our view. We tentatively assume around 4%-6% of

combined effective FX hedge ratio as of July’26 considering the slow increase of BoK

FX forward position (note).…