Tensions Remain Elevated, Dollar Firms

It is difficult to walk back the saber-rattling rhetoric. US Secretary of State Tillerson tried to defuse the situation, which had appeared to ease nerves in North America yesterday. However, references to the modernization of US nuclear forces, a multi-year project begun last year, spurred a fresh threat by North Korea to fire four intermediate range missiles near Guam in week’s time. This, in turn, brought fresh condemnation in from Japanese and Korean officials. 

The net impact is to lift the US dollar, yen and gold. The geopolitical tensions saw more profit-taking in equities. Debt markets are little changed, but the US Treasuries area a little firmer. We suspect that like yesterday, North American participants are likely to unwind some of the anxiety-led price action. Some suspect that the US rhetoric is aimed at putting more pressure on China, but others appear to see the US visceral response as part of the current administration’s modus operandi. There is a search for historical parallels, and although many suggest the Cuban Missile Crisis, we suggest a more apropos precedent is Iran. Still, some recall Nixon’s “madman theory,” which is essentially keeping one’s adversary off balance by having them think that one is unpredictable and is capable of anything. 

In any event, South Korea bears the brunt of the adjustment. The Korean won fell nearly 0.6% following yesterday’s 0.9% slide. It is the third day this week that the won fell and it is set to extend its down draft for the fourth week. For the better part of the past six months, the dollar has traded between KRW1110 and KRW1160.  At the end of July, the greenback tested the lower end of the range. Near KRW1142, it has approached levels last seen in early July.  

Part of the pressure stems from foreign investors selling Korean shares. The Kospi fell 0.4% for its third consecutive loss. Its loss this week of about 1.5% is minor. Foreign investors sold about $230 mln of Korean shares today after selling $270 mln yesterday. Still, we note that the Kospi recovered in late dealing that pared its losses by nearly 2/3 before the close.