Talking Points
NK tests nuclear weapon
UK PPI markedly lower as raw prices plunge
EZ Industrial Orders
JPY US CAD markets all closed
On a day when Japanese, US and Canadian capital markets are all closed for holiday currencies traded in a quiet range but yen was pressured by news that North Korea may have detonated a nuclear weapon at a test facility several hundred miles away from Pyongyang. Although North Korea announced that its nuclear test was a success, both US and South Korean sources could only confirm the occurrence of a seismic event rather than direct evidence of nuclear explosion. Regardless of the details, the news set the FX market on edge and pushed USD/JPY - which already rallied one big figure in the aftermath of US NFP numbers above the 119.00 level. The pair reached a seven month high hitting 119.31 in early Asian trade before receding slightly in Europe. The fear amongst traders is that unless the North Korean situation is quickly contained, the whole region may decide to militarize with both South Korea and Japan seeking to develop nuclear capability to deter North Koreans. Yet, none of the principal parties in the area - especially China - wish to see tensions escalate further. Chinas ambassador to UN Wang Guangya stated Friday that North Korea would face serious consequences if it proceeded with the test and China now appears to be ready to back or at least not block any UN mandated sanctions as a result of today s North Korean test.
Once the geo-political tensions ease, we believe the yen may have good chance of appreciating. Positioning, as evidenced by latest IMM data remains at record shorts against the yen as almost every speculator appears to be on the same side of the trade. Typically such imbalances do not last long in the markets and result in massive unwinding of these positions. As we noted in our weekly commentary The key release (this week) in our book will be the Eco Watchers survey. Over the past two years this measure of man-in-the-street sentiment has been a good forecaster of turns in USD/JPY. If as projected, the gauge once again prints above the boom/bust level of 50 yen strength may not be far behind.
