Saber Rattling Sends FX into a Spin

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Market Drivers August 9, 2017
Saber rattling sends USDJPY below 110
CNY inflation runs cold
Nikkei -1.31% Dax -0.28%
Oil $49/bbl
Gold $1264/oz.

Europe and Asia:
CNY CPI 1.4% vs. 1.5%

North America:
CAD Housing Starts 8:30
USD Non Farm Productivity 8:30

A pair of rhetorical volleys between US and North Korea send FX markets into a spin at the start of Asian trade with USDJPY diving below 110.00 level while USDCHF dropped to .9655 as safe haven flows dominated the start of the session.

President Trump issued an extraordinary ultimatum to North Korea on Tuesday warning Pyongyang not to make any more threats against the United States or they will “face fire and fury like the world has never seen,” during a photo op at the Trump National Golf Club in Bedminster, New Jersey.

Soon after Trump’s comments, North Korea issued a statement saying it was “examining the operational plan” to strike areas around the US territory of Guam in the Pacific, including the Andersen Air Force base.

The threat of armed conflict, no matter how remote or unlikely, rattled the markets at the Asia open, but sentiment calmed into Tokyo afternoon with USDJPY recovering the 110.00 figure while USDCHF eased off its lows as well. Nevertheless, the markets remain on edge as both Mr. Trump and Kim Jong Un are two of the most unpredictable leaders on the world stage and the escalation of words may quickly spin out of control.

US intelligence officials believe that North Korea may have miniaturized a nuclear warhead, though the consensus view is that the country has not been able to weaponize it yet. Still, it is clear that the Hermit Kingdom is making progress in quest to become a nuclear power, and as an outlaw state the country poses an existential threat to the world and remains a key geopolitical threat.

For now, the conflict between US and North Korea remains just a war of words and markets, while wary, are not fully preoccupied with the issue. Still with volatility low and equity investors generally complacent this is just the kind of catalyst that could beget further selling as the week proceeds. With the dollar already under assault for the past several months, the rise of risk aversion flows could only exacerbate its decline against the yen and the Swissie.

For USDJPY the 109.50 is a crucial support level which the pair needs to hold if it is to preserve any semblance of technical uptrend from its lows in March. US economic data has been supportive but so far the markets have ignored the numbers and generally unwound any rallies that accompanied the releases. The end of the week, however, brings US inflation data which may be key to any type of sustained dollar rally if it prints hotter than expected. Low inflation has been the one factor stymying the Fed from taking a more aggressive policy path and a rise towards 2% level in CPI could unleash a strong short covering rally in USDJPY as the week proceeds.

Boris Schlossberg
Managing Director

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