Korean Won's Index-Driven Selling Pressure Is Over, Bank of America Says

The intense, rules-based selling pressure on the South Korean won, driven by equity index rebalancing, has now largely concluded, according to a new analysis from Bank of America. This development removes a significant mechanical headwind that had contributed to the won's underperformance for much of the year.

The Source of the Outflows

The won was one of 2026's worst-performing currencies before staging a sharp 8% rebound in July. According to Bank of America, much of the preceding weakness was due to automatic, non-discretionary outflows from index-tracking funds.

This selling pressure stemmed from two primary factors:

• The oversized weight of major stocks like Samsung Electronics and SK Hynix relative to benchmark caps, which triggered automatic selling mechanisms.
• The South Korean market's outperformance against the broader emerging markets basket, which prompted global funds to reallocate and reduce their overweight positions.

Rebalancing Drag Has Ended

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Bank of America strategists report that this "mechanical drag" is now "largely at zero" following the most recent index review. A recent correction in the South Korean market also helped eliminate its overweight status relative to other emerging markets, further easing the pressure.

The bank's analysis is supported by a regression model it built to track the phenomenon. The model, which linked the rules-based selling to risk appetite and currency movements, successfully captured about one-third of daily flow volatility and tracked cumulative annual outflows to within a $50 billion margin of error.

Market Volatility Now the Key Driver

With the rebalancing effect neutralized, the primary driver of potential capital outflows has shifted to market volatility. Bank of America notes that a final wave of fund withdrawals now depends on whether the Korea Volatility Index (VKOSPI) can stabilize.

For investors, this means that the won's direction is now less likely to be influenced by these predictable, index-related flows and more by broader market sentiment and risk appetite.