Average daily offshore non-deliverable forward (NDF) trading by non-residents fell for a second straight month, a shift that emerged after South Korea extended won trading to 24 hours in July and has drawn attention to whether demand is moving onto the domestic currency market. Non-residents also turned net sellers of NDFs in the third quarter, which analysts say may have added to upward pressure on the won.
Average daily NDF trading between non-residents and domestic foreign exchange banks fell to $22.78 billion in September from $23.56 billion in August and $24.74 billion in July, according to a report on international financial and foreign exchange market trends released by the Bank of Korea on the 16th. That is a drop of $1.96 billion, or 7.9%, over the two months.
Market participants are focusing on the possibility that the 24-hour won trading system, which took effect on July 6, has affected offshore NDF activity. Demand for won trading had previously concentrated in the offshore NDF market after the domestic foreign exchange market closed, but the new system allows overnight trading at home as well. Overnight forward and foreign exchange swap transactions through domestic foreign exchange brokers totaled $111.54 billion from the start of the system through the end of August.
Average daily NDF trading in the third quarter still rose 4.2% from the previous quarter to $23.73 billion, lifted by July volumes. Some analysts say the past two months of declines alone are not enough to conclude that overall trading is shrinking or that demand is shifting to the domestic market.
The direction of trading has also changed. Non-residents net sold $30.7 billion worth of NDFs with domestic foreign exchange banks in the third quarter, reversing net purchases of $27.03 billion in the first quarter and $26.9 billion in the second quarter. They posted net selling for three consecutive months: $14.14 billion in July, $6.7 billion in August and $9.86 billion in September.
An NDF is a derivative in which the won and the dollar are not actually exchanged; only the difference between the contract rate and the exchange rate at maturity is settled in dollars. Net purchases of NDFs by non-residents typically put upward pressure on the won-dollar exchange rate, while net selling can push it lower. The won-dollar rate fell 71.2 won to 1,352.8 won at the end of September from 1,424 won at the end of July. Other factors, including dollar selling by exporters, were also at work, making it difficult to pin down how much the net selling of NDFs contributed.
One foreign exchange market official said the shift to net selling of NDFs may have added to upward pressure on the won, but that it remains to be seen whether this is a structural change stemming from the move to 24-hour trading.