NPS to be game changer in Korean FX market in 2026: Morgan Stanley

Electronic signage is shown at Morgan Stanley headquarters in New York, March 2021. AP-Yonhap

Kathleen Oh, Morgan Stanley's chief Korea and Taiwan economist / Courtesy of Morgan Stanley

HONG KONG — Korea’s National Pension Service (NPS) is poised to become the most influential factor in the country’s foreign exchange market this year, potentially acting as a “game changer” in boosting the won, according to Morgan Stanley.

Two major policy shifts are expected from the state-run fund, focused on its foreign exchange hedging ratio and asset allocation strategy, said Kathleen Oh, the investment bank’s chief economist for Korea and Taiwan.

The NPS has maintained a 0 percent hedging ratio, leaving its assets fully exposed to currency fluctuations. At the same time, its allocation to overseas investments has steadily increased. As of November 2025, overseas assets made up 59.6 percent of its total assets under management (AUM) of 1,438 trillion won ($997.4 billion).

"We do think the changes could be announced earlier than May this year, which is the usual timing of the announcement of the allocation, and the adjustments to hedging strategy could be possible," Oh said in a recent interview with The Korea Times, adding that a clearer picture will emerge with the appointment of a new CIO.

The Korean won struggled in 2025, becoming one of Asia’s worst-performing currencies. The exchange rate briefly rose past 1,480 won per dollar on Dec. 23, 2025, reaching levels comparable to those seen during the political uncertainty following former President Yoon Suk Yeol’s martial law declaration in December 2024.

Oh noted that Korea recorded a $105 billion trade surplus in 2025, yet market participants’ hedging activities were misaligned with capital inflow dynamics. Meanwhile, retail investor outflows nearly doubled to $51 billion in 2025 from $26 billion a year earlier, alongside the NPS’ substantial unhedged overseas exposure.

"The imbalance in the hedging activities, as well as the large marginal pick up in the outflow had a faster impact on the Korean won versus the inflow of the dollar," Oh said, adding that the Japanese yen's fluctuations also impacted the Korean currency's movement in early 2026.

Looking ahead, Morgan Stanley forecasts the won-dollar exchange rate to fall to 1,430 in the first quarter of 2026 and to 1,410 in the second quarter.

As the NPS becomes a dominant force in the currency market, policymakers have begun revising its governance and strategic framework.

On Jan. 26, the fund’s management committee approved an increase in its domestic equity allocation to 14.9 percent from 14.4 percent and raised its domestic bond allocation to 24.9 percent from 23.7 percent.

A task force overseeing the NPS’ strategic overhaul said on Feb. 5 that it is reviewing the fund’s current policy and will consider revisions, including establishing guidelines on foreign exchange hedge ratios.

External factors to play greater role in 2026 economic outlook

Oh said Korea’s 2026 economic outlook is expected to be more heavily influenced by external conditions than in 2025. Key variables include the recovery of non-tech exports, the trajectory of the Korean won and its impact on inflation, and whether household spending power improves in the absence of government stimulus measures such as coupons or cash vouchers.

"Our GDP forecast sits at 1.9 percent in 2026, and 10 to 20 basis points of upside is possible. We anticipate broad-based economic recovery, with no rate change for the Bank of Korea. If needed, fiscal expansion in the second half is likely," Oh said.

Despite the semiconductor boom, Oh forecasted that the disparity between export performance and domestic economic trends would persist for some time.

Tech manufacturing, especially semiconductors, does not generate a strong trickle-down effect on the broader economy, as the sector is highly automated and requires only a limited pool of highly skilled workers.

"I don’t think this is a problem that we can resolve immediately. It is more important to create a balanced growth picture by further encouraging the domestic recovery and structural changes," Oh said, adding that two years of fiscal support could be appropriate to sustain the recovery.