The recent ‘war of words’ between the US and North Korea escalated further yesterday, after the regime’s foreign minister said that a tweet from US President Trump over the weekend amounted to a ‘declaration of war’. Given this declaration, North Korea has the right to shoot down US bombers even outside of its own airspace, the minister added. Even though this is not the first time North Korea has made war claims, the continued intensification in rhetoric may have put the prospect of military conflict back on the investors’ radar.

Markets reacted in a classic risk-off manner. Safe haven assets such as the JPY, CHF, and gold, all spiked higher on the news, while equity indices tumbled. Focus now turns back to Trump. If his response is along the same ‘fire and fury’ wavelength, the latest price action could continue. We could see another round of risk aversion that benefits haven assets and weighs on riskier ones. On the other hand, a more diplomatic approach, such as an official statement from the White House instead of a tweet, could lower the likelihood of armed conflict and thereby reverse some of the latest market moves.

Looking at the big picture, although another round of fiery rhetoric could keep safe havens supported for a while, we maintain our view that as long as this does not translate into actual war, investors are likely to place less and less emphasis on this crisis moving forward. Rhetoric alone is unlikely to continue driving markets for long.

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USD/JPY traded lower yesterday following North Korea’s rhetoric. The pair fell below the support (now turned into resistance) of 111.80 (R1) and now looks to be headed for a test near the key territory of 111.00 (S1). That hurdle acted as the upper bound of the prior sideways range that’s been in place from the 28th of July until the 18th of September. As such, as long as the rate is trading above that level, we consider the short-term outlook to still be cautiously positive. If the bulls manage to take charge near 111.00 (S1), we would expect them to aim for another test near 111.80 (R1). If they overcome it, then they may target our next resistance of 112.70 (R2).

As for the bigger picture, we still see a longer-term sideways range between 108.70 and 114.30. The fact that the latest recovery started from near the lower bound of the range enhances our view that the pair may rebound again and trade higher, perhaps aiming for the upper bound in the foreseeable future.

Oil prices edge higher as Erdogan threatens the Kurds

Oil surged yesterday, after Turkish President Erdogan threatened to ‘close the tap’ and cut oil flows from Iraq’s Kurdish region to the rest of the world. These remarks followed an independence referendum by Iraqi Kurds on Monday. Given this fresh risk of supply disruptions, we see the case for oil to remain supported for a few days, especially considering that Erdogan could follow-up his threat and push prices even higher. Looking further ahead, the next major theme in the oil market will probably be the OPEC meeting in late-November. Even though there are still eight weeks left until that gathering, speculation for a potential extension or expansion of the current deal could begin well ahead of that time.

WTI surged yesterday on Erdogan’s threats. The price emerged above the key resistance (now turned into support) of 51.50 (S2) and subsequently, it broke above 52.00 (S1). The price structure on the 4-hour chart suggests a short-term uptrend and thus, there is the possibility for crude oil to challenge the 53.00 (R1) territory soon. Having said that though, even if WTI continues to trade north for a while, we remain skeptical on whether a healthy long-term uptrend can be established. The price has entered the longer-term sideways range, between 51.50 (S2) and 55.30 (R3), where we believe US shale producers may be attracted to increase production. Something like that may put a lid on any future gains.

Today’s highlights:

We only get second-tier indicators from the US today. The Case-Shiller house price index for July is forecast to have accelerated somewhat in yearly terms, while new home sales are expected to have risen in August. We also get the Conference Board consumer confidence index and the Richmond Fed composite index, both for September.

We have five speakers on the agenda. From the Fed, Chair Yellen, Cleveland President Mester, Atlanta President Bostic, and Board Governor Brainard, will all speak. We will also hear from ECB Executive Board member Praet. Markets may focus mainly on Yellen, but since we already heard from her last week, any reaction may be limited.

USD/JPY

Support: 111.00 (S1), 110.60 (S2), 110.00 (S3)

Resistance: 111.80 (R1), 112.70 (R2), 113.60 (R3)

WTI

Support: 52.00 (S1), 51.50 (S2), 51.00 (S3)

Resistance: 53.00 (R1), 54.00 (R2), 55.30 (R3)

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