North Korea Thermonuclear Ambitions Rock Markets

It was one of the more bemusing NFP numbers in recent times as confusion reigned amidst technology errors and incorrect data postings adding to one of the more chaotic NFP releases. Initially, the USD tanked but quickly rebounded once traders factored in August seasonality and a correction on the AHE print.

But this morning’s chatter is all about the weekend news stream which centred on another North Korea (NK) escalation after a hydrogen bomb was tested.

The US administration was quick to send out the troops. In an unprecedented move and a  stage usually reserved for the president, Defence Secretary James Mattis with General Dunford as wingman rolled out to provide the White House brief to Washington’s press corp sending a clear and unambiguous message that military options are on the table.
So it all eyes on dollar yen this morning, as it’s expected this latest NK aggression, could further intensify geopolitical tensions.But while traders continue to trip over themselves shorting USDJPY on these flare ups, today’s move to 109.00 was faded in the absence of any actual significant Japanese Institutional investors repatriation flow

But the key now is how the international community will respond given how ineffective the tightened UN sanctions have been at discouraging NK ‘s ambitions. However, given just how thin liquidity conditions are, level heads may opt for the sidelines until deeper pools emerge, or further clarity is given.

One would assume this recent thermonuclear test crosses that proverbial line in the sand, so eyes will be on China to see if they step up with further restrictions on NK  energy exports.

While we should expect the usual FX haven trades to play out and a modest correction in equities, I think the street has grown accustomed that these moves remain short lived and may be viewed as a good opportunity to add risk. Unless there is an actual global military response, we should expect this hand to play out as we’ve seen in the recent past.

Euro

The Euro moves are all about the central bank policy dilemma.And while the Fed rate hike is not the only game in town, but with uncertainty building between the ECB hawks and dovish, the path to EU interest rate normalising looks a bit more clouded than it did a month ago.

Japanese Yen

Trader’s can’t avoid the temptation to get in front of possible repatriation flows even if a military escalation is unlikely. But with the Fed still appearing parked in neutral, coupled with risk aversion given the heightened geopolitical tension will likely keep the topside in check short term.