06:44 AM EST, 12/04/2024 (MT Newswires) -- The biggest mover during the Asian trading session Wednesday was the South Korean won (KRW) which is rebounding following Tuesday's sharp sell-off, said MUFG.

After hitting a high Tuesday of 1,444.1, USD/KRW has fallen back towards the 1,400.0 level early Wednesday, wrote the bank in a note to clients. After imposing martial law Tuesday in South Korea, President Yoon Suk Yeol quickly backed down and rescinded martial law after Korean assembly members passed a vote to overturn martial law despite efforts by the police and special forces to secure the building to prevent the vote.

The failed "auto-coup" is likely to lead to President Yoon being impeached followed by new presidential elections, stated MUFG. According to reports, parliament may vote on an impeachment motion on Saturday at the latest after the main opposition party the Democratic Party and five other opposition parties submitted the motion on Wednesday.

Impeachment would require support from two-thirds of parliament so requiring the vote from eight members from the ruling party as well.

To dampen financial market volatility, the South Korean central bank (BoK) held an extraordinary meeting just a week after delivering a surprise rate cut, pointed out MUFG. The BoK stated that it will increase short-term liquidity and take "active" steps in the foreign exchange markets as needed to ensure stability.

While there is relief that the period of martial law proved to be short-lived which should limit economic disruption and dampen initial concerns over disruption to global semiconductor supply, it could have a more lasting impact on investor confidence towards South Korea, added the bank. The period of political instability comes at a bad time when South Korea is facing looming challenges including the potential threat of higher tariffs from the United States.

The US trade deficit with South Korea has more than doubled in recent years to $62.8 billion in the 12 months to September compared with $28.9 billion in the 12 months to September 2021.

MUFG expects spill-overs to G10 currencies from political developments in South Korea to remain limited beyond the initial safe haven flows that saw the yen strengthen and US yields drop.