Korean NPS opens up forex hedging limit to maximum of 10%

South Korea’s mighty state pension fund will hedge foreign exchange risks for up to 10% of its overseas investment for a limited period. 

The National Pension Service of Korea (NPS) announced the decision on Friday without giving a specific timeline. The move is forecast to ease the demand for the greenback on the onshore foreign exchange market. 

A panel that governs the investment policies at the fund decided on the adjustment earlier that day.

The latest decision comes on the back of a request by the Ministry of Economy and Finance to increase the ratio of FX hedging in order to decrease the market impact of the fund’s dollar-buying activities. 

After the panel meeting, the finance ministry released a statement that said: “If foreign exchange rates increase to unexpectedly high levels again, it’ll be necessary to temporarily decrease the foreign exchange exposure until the rates stabilize.”

The NPS manages a total of 900 trillion won ($687 billion).

As the fund’s investment has grown in size, the increasing purchases of the US currency have been blamed for weakening the won further while the greenback continued to strengthen against virtually all other currencies. 

In October, the Korean won tumbled to the lowest level in 13 years against the dollar. 

The Korean NPS has gradually lowered its forex hedging limit since 2014. The FX policy relaxation was based on the logic that hedging naturally occurs when the fund diversifies its investment in several currencies including the US dollar, the euro, and the Japanese yen. 

But problems began to arise this year when the dollar strengthened drastically against the won. 

Experts say the latest measure could inject up to $40 billion into the Korean foreign exchange market. 

The Friday's decision was widely expected as Deputy Prime Minister Choo Kyung-ho, who also heads the finance ministry said last month that the government will request measures to up the FX hedging limit to respective agencies including the NPS.

In September, Choo warned that Seoul will "sternly and timely respond to actions disturbing the [foreign exchange] market." 

Write to Jun-Ho Cha at chacha@hankyung.com
Jee Abbey Lee edited this article.