Asia FI & FX Strategy Viewpoint: KRW – how and when to go with the flow

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Asia FI & FX Strategy Viewpoint

KRW – how and when to go with the flow

The bigger they are, the harder they fall

03 August 2026

Korean equities and the won are living though one of their great round trips in recent

history. A nearly four-fold surge in the Kospi to a record, powered by two chip giants,

followed by a correction of close to a third. Likewise, the Korean won, which went from

being one of the worst performing currencies in 2026, to delivering an 8% rally in July.

We build a simple daily regression to ask a practical question: what is really driving the

selling, and is it close to being done?

GEM FI & FX Strategy

Asia

Claudio Piron

Emerging Asia FI/FX Strategist

Merrill Lynch (Singapore)

Mechanical rules vs. the markets

Much of the sales were mechanical. When Samsung and SK Hynix grow too large,

benchmark rules force index-trackers to trim; when Korea outruns emerging markets,

global funds rebalance away. The regression ties these rules-based forces together with

risk appetite and the won, capturing about a third of daily flow swings and tracking the

year’s cumulative exodus to within about $5bn.

Glossary of Acronyms

The mechanical selling (almost) done

ETF – Exchange Traded Fund

That mechanical drag has now faded to roughly zero. The index cap driven selling

switched off after the latest index review, and Korea’s own correction has erased its

emerging-market overweight. What remains is a volatility story - so the final leg of the

exodus now hinges on the VKOSPI calming down, not on more index selling.

EWY - iShares MSCI South Korea ETF

VKOSPI – Kospi volatility index

derived from option implied volatility

Exhibit 1: Actual flows remain well-explained by the regression

Fitted cumulative flows closely mirror actual outflows in 2026

40

YTD 2026 cumulative flow: actual vs fitted

0

-40

-80

-120

Jan-26

cum_actual_usd_bn

Feb-26

Mar-26

Apr-26

cum_fitted_usd_bn

May-26

KOSPI Korea Composite Stock Price

Index

Jun-26

Jul-26

Source: BofA Global Research, Bloomberg

BofA GLOBAL RESEARCH

Trading ideas and investment strategies discussed herein may give rise to significant risk and are

not suitable for all investors.…