HomeContributorsFundamental AnalysisNorth Korea Adds Tail Risk

North Korea Adds Tail Risk

The latest North Korean missile test and hostile words from the US in reaction raise the risk of a destabilizing surprise. The Swiss franc was the top performer Wednesday while the Canadian dollar lagged but the magnitude of the moves was small. Australian trade balance is up next. A new Premium trade has been issued with 4 supporting charts backing the trade.

United States ambassador to the UN Nikki Haley had strong words for North Korea on Wednesday. She said the latest missile test was a sharp escalation and that the US will use its military if it must and could go its own path.

Markets largely ignored the rhetoric but it’s a clear escalation. US leaders are also increasingly pointing the finger at China as the enabler of North Korea. The latest tweet from Trump noted that trade between the countries grew 40% in Q1. ‘So much for China working with us,’ he wrote.

We don’t think words – even harsher words – will rattle markets but the moment any actions are taken it will be a game changer. China has said that military must not be an option but if the US puts it in play it would threaten to rollback China-US relations and plunge South Korea into war. It would be a sharp retrenchment in risk assets and a flight to bonds.

In separate news, the FOMC minutes highlighted messages the Fed had already sent. Namely that most officials don’t believe that the latest downtick in inflation is real or long-lasting. On bond purchases, they are undecided about whether to start the run-off in September or later.

Looking towards Asia-Pacific trading, the lone data point to watch is the 0130 GMT release of Australian trade balance for May. A surplus of A$1 billion is expected after a $555m surplus in April.

Ashraf Laidi
Ashraf Laidihttp://ashraflaidi.com/
Ashraf Laidi is an independent strategist and trader, founder of Intermarket Strategy Ltd and author of "Currency Trading & Intermarket Analysis". He is the former chief global strategist at City Index / FX Solutions, where he focused on foreign exchange and global macro developments pertaining to central bank policies, sovereign debt and intermarket dynamics. Ashraf had also served as Chief Strategist at CMC Markets, where he headed a global team of analysts and led seminars and trainings in four continents. His insights on currencies and commodities won him several #1 rankings with FXWeek and Reuters. Prior to CMC Markets, Laidi monitored the performance of a multi-FX portfolio at the United Nations, assessed sovereign and project investment risk with Hagler Bailly and the World Bank, and analyzed emerging market bonds at Reuters. Laidi also created the first 24-hour currency web site for traders and researchers alike on the eve of the creation of the euro. Laidi's analysis of currency markets stand out based on his distinct style in bridging the fundamental and technical aspects of the markets. Laidi regularly appears on CNBC TV (US, Europe, Arabia and Asia/Pacific), Bloomberg TV (US, Asia/Pacific, France and Spain), BNN, PBSs Nightly Business Report, and BBC. His insights also appear in the Financial Times, the Wall Street Journal and Barrons. He has given numerous interviews and lectures in Arabic, French, and to audiences spanning from Canada, Central America and Asia/Pacific.

Featured Analysis

Learn Forex Trading