N. Korea nuclear test and the FX market

Discussion in 'Forex' started by Kastro_316, Oct 9, 2006.

  1. I am sure all of you know that N. Korea just tested a nuclear bomb. (big surprise)

    Is anyone adjusting any trades now because of the test? How do you think the test, and the effects of the test will effect certain currencies?

    Take care,
  2. btud


    I am aware of the test, of course. I don't think it to be a surprise at all. It was in fact announced by the north-coreans themselves last week. And longer term is not a surprise either as it's been years since we all know that north-coreans have the capability of building multiple nuclear devices (between 6 to 12 I believe was the latest assesment).

    The latest surge in USDJPY was partially triggered by these developments. A significant trendline was breached, so we may see a move to take last years' high at 121.4. In the very unlikely scenario that this high is taken, the barriers around 125 shoud cap any further rally attempt.

    The major risks are, however, to the downside at the moment. The incredible extreme values in speculators positioning means that there is really very little money left to push the prices higher.

    So the analysis looks as follows:

    short term: the speculators will need to take profits or will be forced to stop the losses by any down move in the USDJPY.

    medium term: the carry trades initiated this year will have to be unwinded at some moment, when the risk apetite dries out.

    longer term: the secular downtrend in USDJPY will at some point resume.

    Of course we have to consider also the crosses. Both EURJPY and GBPJPY are much more overvalued than USDJPY is. Unwinding in any of these pairs may be the trigger for the avalanche.

    All in all, this story with North Korea, may provide us with an excellent level from which to build long Yen positions. But of course, great care must be taken. First wait until traders start paying less attention to the story in Korea. Wait until all words are said, until all threats are made and things start to clarify.
    Play light until then, and grow your positions only when you're pretty certain that the avalanche has started.
  3. btud,

    Thanks for the fundemental update. Rather informative. Could you expand on the secular downtrend? Do the recent interest rate decisions play a part in this?

    the secular downtrend in USDJPY will at some point resume.
  4. btud


    I think the interest rate decisions are more likely to act at the medium term level, where carry trades are. I don't know for sure what are the more fundamental forces that determine the long-term downtrend. I have just pointed out that it exists. If I was to guess, the yen tendency to appreciate should have something in common with all Asian currencies tendency to slowly appreciate over time. It may be related to the fact that all economies in the region produce more than they consume, while in US things are reversed. It may also have to do with a slow decrease in interventionism by the governements, which means a slow approach to an equilibrium rate. This is marked by periodic retracements, which may be triggered by medium-term events, like interest rate cycles or intervention by central banks.

    If you look at the monthly chart since 1980 we had a long series of lower highs: peak at 278 in 1983, then 263 in 1985, then 161 in 1990, then 148 in 1998, the last major one being 135 in 2002.
    At this point the price seems to try to make the next top. In case it goes beyond 135, the secular downtrend is over. But until then, the long-term bearish view remains. As I have said, I don't think we'll go beyond 125 in this wave, because of medium and short-term resons (which include the recent recovery in Japan economy, the start of tightening, the overuse of the yen carry in the last years, the overvaluation in crosses and the extreme speculative positioning).
  5. Thanks...wow I got more than I wanted. There are some really knowledgeable posters here, in which I am thankful for.

    Thanks btud

    Michael B.

  6. btud


    You're welcome. The truth is that I also learned a lot from other posters on this forum, which are more knowledgeable than me...