Intraday Market Thoughts

Korean Fuse Burns Risk Trades

by Adam Button
Sep 4, 2017 0:40

North Korea detonated its largest test yet as it sprints toward nuclear-power status, and perhaps towards war. The yen and Swiss franc are strongly higher in early trading as a result. Gold gapped up to 1337 from Friday's 1325. CFTC positioning data showed further bets against the pound. US and Canadian markets are closed on Monday.  3 Premium trades are in progress but 2 trades will be added ahead of what will be prove to be a busy 1st week of September (Korea, BoC and ECB). 

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Korean Fuse Burns Risk Trades - Korea Mkt Reaction Sep 4 2017 (Chart 1)

North Korea tested a nuclear weapon underground on Saturday that appeared to be 5-10x more powerful that previous tests. It was Pyongyang's 6th nuclear test, which triggered a 6.3-magnitude quake and was felt throughout northeastern China. A statement from Kim Jong-Un's government said it was a hydrogen bomb that was small enough that it could be loaded onto an ICBM.

Risk trades are under pressure with the yen and Swiss franc around 50 pips higher across the board. Expect more risk aversion as Europe begins trading and note that markets will be thin with the US on holiday.

The speed of North Korea's progress and testing is alarming. They are evidently years ahead of where experts had believed. In a tweet, Donald Trump said the United States is considering, in addition to other options, stopping all trade with any country doing business with North Korea. That's almost-certainly a hollow threat because China is by far its largest trading partner with India second.

Most of the UN Security Council is angling to cut off North Korea's oil supplies. As recently as last week China said it didn't want further sanctions.

The immediate risk probably isn't nuclear war but some kind of trade spat between China and the United States. According to reports, Trump has already asked aides for tariffs on China for trade and political issues but if they pass and Trumps justifies them geopolitically, then it would certainly be interpreted as an escalation.

Ultimately, the fears and rhetoric will subside but at this point it looks like it will get worse before it gets better.

CFTC Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

EUR +87K vs +88K prior GBP -52K vs -46K prior JPY -69K vs -74K prior CHF -2K vs -2K prior CAD +53K vs +51K prior AUD +67K vs +60K prior NZD +19K vs +22K prior

The moves were modest this week but the trend has been a slow build in pound shorts and that's understandable given the endless Brexit risks. One spot that's vulnerable in the week ahead is NZD, which has caught specs off guard in a continuing slide.

Act Exp Prev GMT
Eurozone PPI (m/m)
Sep 04 9:00

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