North Korea Missile Launch Weighs on Yen

Talking Points

        ·          RBA rates on hold

·          North Korea missile launch stirs up yen

·          EZ Services PMI rises but Retail Sales disappoint

·          US Factory Orders sole data on tap
        

North Korea launched possibly as many as ten missiles of varying ranges on July 4^th holiday, escalating tensions with its neighbors in Asia Pacific.  The news sent USD/JPY back above the 115.00 level as traders sold yen on fears of growing diplomatic conflict in the region. However,  the reaction in the FX markets was not nearly severe as headlines would indicate after reports confirmed that the most dangerous  of those missiles the long-range Taepodong-2 - failed after only 35 seconds of flight demonstrating North Koreas shortcomings in mastering the complicated technology.

Nevertheless, the North Koran missile launch was only the latest in a series of political and geo-political factors that have weighed on the yen recently with the currency reaching all time lows against euro in Asian trade as the EUR/JPY cross reached record highs of 147.29 in the aftermath of the news. Although the diplomatic situation remains tense with South Korea threatening to cut off talks and curtail humanitarian aid while US confers with UN security council to determine appropriate sanctions, the military threat appears to have actually diminished in the wake the failed launch  of the long range missile.  As such, the long term implications for the yen may in fact be positive, once the market understands that Japan faces no credible threat from North Koreas military exercises.  Indeed, by early US trade USD/JPY had already traded below 115.00 as concerns for Japans safety began to subside.

In the Euro-zone,  news was mixed as economic data painted a contradictory picture. EZ PMI Services printed at 60.7 considerably better than the market expectation of 59 while EZ retail trade  was considerably worse than forecast, actually contracting -0.6% against an expected rise of 0.2%. Furthermore the data for the  month prior was revised downward to 1.0% from 1.4% previously reported. Retail Sales may be simply lagging the rest of the economic data in the 12 member region as consumer sentiment takes time to adjust to improved market conditions. However, tonights news only reinforces our opinion that the ECB will pursue a moderate course in monetary policy raising rates by no more than 25bp from now until September, in order to nurture what still appears to be a relatively fragile consumer recovery in the Euro-zone.

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