North Korea’s Next Move – Part 2

Korean tensions have been cooling off a little. There is no sign of North Korea’s vaunted missile test towards the U.S. territory and military base in Guam, although there have been some preliminary signs that a submarine launched missile test may be imminent. If such a test is conducted, it will certainly raise tensions still higher. Despite these factors, nobody is expecting war might break out imminently, as North Korea will probably achieve its near-term strategic objectives simply by conducting successful missile tests, and the U.S.A. would need to move more military equipment and personnel closer to Korea to be able to launch a credible strike at the North Korean leadership and nuclear weapons.

A new North Korean test would certainly hit stock markets and other risk assets, and would be highly likely to boost safe-haven assets such as gold and the Japanese Yen, despite the paradox of Japan’s location as a potential target for a North Korean strike. 

source: cnn.com

source: cnn.com

A full-scale war would certainly be won by the U.S.A. but at a very high cost to South Korea. North Korea possesses the largest artillery force in the world, and South Korea’s capital Seoul is well within its range. Seoul has a population of more than 25 million people and senior U.S. military personnel estimated in 2005 that it would be very difficult to protect Seoul over the first 24 to 28 hours of a conflict, and resultant casualties from even a conventional attack might be as high as 100,000 people killed, plus massive structural damage. With this in mind, in addition to the emotional bonds felt by South Koreans towards their kinfolk in the North, it is understandable that the South Korean leadership has begun making public noises against war. This, in turn, places the U.S. in a tough position: whether to allow the development of nuclear-tipped ICBMs by North Korea, with the possibility that such weapons might be exported to or otherwise shared with Iran, leading to a subsequent deterioration of American power in Asia and the Middle East, and an increased vulnerability of the U.S. homeland to nuclear attack or nuclear terror. Yet the alternative would be triggering the most terrible war the world has seen in a lifetime, against the wishes of South Korea, which would bear horrific casualties.

North Korea’s Next Move

After yesterday’s exchange of threats between the U.S.A. and North Korea, which have had a clear effect on short-term market sentiment, it was unclear how the situation would develop. The North Korean threat seemed to clearly indicate a missile attack on the U.S. military base in Guam. This would be a clear casus belli, and would seem to make no sense as a strategic move if the threat was carried out by North Korea.

The situation has become a little clearer today, as new statements from North Korea indicate an intended missile test, with unarmed missiles falling close to but outside Guam’s territorial waters. This makes more sense as a strategic move, as it would be a way for North Korea to continue to look tough and assertive and to challenge the United States without really giving the U.S. enough of a moral pretext to retaliate with any kind of military action. 

source: cnn.com

source: cnn.com

North Korean state media are now saying that the proposed missile test towards Guam is being planned and put before Kim Jong Un for a decision within a few days. Although few analysts are expecting war to break out, North Korea has carried out all its threatened missile tests in recent months, and so has established some credibility. It might be that there are behind the scenes negotiations currently running between the U.S.A. and North Korea, and this threat is North Korean pressure as part of these negotiations. After all, Kim may announce he has decided not to pursue the test. Yet what if North Korea goes ahead with a successful test? How will the U.S. respond? This is the question, and the answer to that may well determine how market sentiment looks going into next week. If North Korea calls off the Guam test, risk on assets such as precious metals might stop rising. If such a test goes ahead and is successful, tensions will rise and we can expect precious metals to spike and stocks to sell off.

Something Changed

I spoke too soon yesterday, about the typical dull, quiet summer market that we are experiencing. It now fees as if something has changed and the market feels qualitatively different. This might be a flash in the pan, yet my traders’ intuition (if there is such a thing) is telling me that something important is happening. There is a headline behind this, namely the strong verbal threats being issued back and forth between the U.S. and North Korea, but underlying conditions are fragile. North Korea’s threat to obliterate a major U.S. military base on the island of Guam is very inflammatory language to use against the world’s only superpower; President Trump’s response was also very strong.

Although threats of war in Korea can be expected to boost safe havens, and have done so, the movements have not been very large, and as Rex Tillerson moves to calm the rhetoric, few are expecting to war to break out over the coming days. However, it has been a while since we had a clear “risk on” market move, and as there is a growing conviction among analysts that stocks and risk are overpriced, this movement we see beginning now could be the start of a new trend.

I might be wrong, but I just got out of stocks, as yesterday’s sharp dive from new highs on the Dow Jones has spooked me. We also see the Japanese Yen and precious metals dominating the market with strength, and the U.S. Dollar advancing everywhere else, except energy.

This “risk on” move may die away quickly if tensions dissipate, but what happens over the next few days may give us some clues as to where the market might start to go when the holiday season ends in a few weeks.

Bitcoin Makes New All-Time Highs

It is August, the early part of the week, and there is an extremely light news schedule. Taken together, these are classic reasons why the market should be so extraordinarily quiet, as it is. For those of us not off enjoying a holiday somewhere, this can be a frustrating time: you can’t extract much alpha from markets when they are barely moving! Ironically though, there is at least one hot market boiling over right now – Bitcoin. The crypto-currency, after its “hard fork” last week, has gone to make new all-time high prices, rising by more than 22% since last Friday’s close alone!

Although there is a lot of fear that this is a bubble prone to bursting suddenly and spectacularly, I think this is a great asset to trade on a short-term basis, provided you use low leverage. It is trending strongly, and by using stop losses and very low leverage, you should be able to protect against catastrophic losses, although significant slippage in the event of a crash is a reasonably likely eventuality.

A big part of successful trading is the correct utilization of opportunist instincts. What that means in plain English, is making sure you get a piece of what’s going on right now. It is all very well to stay on the sidelines, and a great thing about retail trading is that you are under no pressure except that which you put on yourself. Yet, it is possible to be too cautious and overly restrictive of the assets you trade. If you can trade Bitcoin, and you really need a positive chance of making some good profits this month, it is probably a good idea to make sure you are in the frame here. The BTC/USD pair is the usual way of trading it, and this pair has behaved very technically, respecting obvious support and resistance and trend lines, so it is very “tradable”.

Bitcoin

Non-Farm Payrolls Result

Last Friday 4th August we had the monthly round of Non-Farm Payrolls data from the U.S.A. Average Hourly Earnings and the Unemployment Rate came in exactly as expected, at 0.3% and 4.3% respectively. The headline new jobs created figure, however, was 209,000 compared to the consensus estimate of 182,000 which represented an overshoot of 14.84%. I anticipated that a figure exceeding 220,000 would be likely to trigger a sharp move against the U.S. Dollar, which has been in a long-term bearish trend for some time. Although the number came in meaningfully lower, it still triggered a rise in the greenback, although it is an open question as to whether this is just a blip in the larger trend of the start of a meaningful reassessment of the Dollar. The best way to begin to answer that question is to start with a review of how much various currencies moved against the USD from the release of the data to the close of the market:

EUR -0.51%

GBP -0.81%

CHF -0.52%

JPY -0.56%

AUD –0.46%

NZD -0.46%

CAD -0.71%

These are not notably large swings by any measure, so I believe we have not seen the start of a major trend reversal. The resilience of the EUR and NZD stand out, with the NZD looking more impressive than the AUD as the move did not break below any key technical support levels in the NZD/USD currency pair.

As for other assets, the stock market was barely changed, with the S&P 500 Index falling by a mere 0.08%. Crude Oil rose by 1.31% while Silver fell by a whopping 2.99%. This suggest that the converse of a strong EUR and NZD is weakness in the GBP and Silver. Nevertheless, I do not see any obvious “flow” action going on between any of these potential crosses.

US Dollar

Non-Farm Payrolls Outlook

Tomorrow, Friday 4th August, will bring one of the most keenly anticipated pieces of monthly data in the Forex market: the amount of new jobs created in the U.S.A. over the past month, as well as related ancillary data such as the unemployment rate and average hourly earnings change. These numbers are taken as a key barometer of the health of the U.S. economy, and changes in this sentiment can have major effects upon the exchange rate of the U.S. Dollar against other currencies. The U.S. Dollar has been the primary driver of Forex market movements for many years now.

The market consensus is anticipating that the creation of 181,000 new Non-Farm jobs will be reported. A number significantly in excess would be likely to strengthen the U.S. Dollar, while a significantly weaker number would probably weaken it. Yesterday’s ADP forecast number came in at 178,000 which was extremely close to the forecast, meaning that a significant deviation by the real number would be a greater surprise than it otherwise would be.

It is true that there is a strong trend against the U.S. Dollar at present, which suggests that the bigger movement should lie in an unexpectedly weak result. However, sometimes in mature trends, surprises against the trend can trigger very sharp moves, and I think this is probably what would happen tomorrow if the number is very strong, say, exceeding 220,000.

As for trading after the announcement, it is always good to let a few minutes elapse, and to allow for very high volatility in position sizing. If the Dollar is getting hit, the primary beneficiaries are likely to be the Euro and perhaps also the British Pound. If the Dollar is instead boosted, then this is most likely to be best expressed by a rise in the USD/JPY currency pair.

1USD

Reversal Trade: Crude Oil, Silver?

In the absence of strong trends, the most success I have had in trading popular commodities such as crude oil and precious metals has been by waiting for the price to hit key horizontal levels which have acted as successful support and resistance when they were last reached, and waiting for a definite turn in the price signaling a reversal before entering a trade. I have recently taken successful trades using this method in Silver, Natural Gas, and Crude Oil. I have found it is important to draw the key levels and then wait very patiently for the price to get there before seriously considering whether to enter a new trade: trying to “find” a trade on the chart is a dangerous way to operate. Two possible trades I have been starting to consider are short WTI Crude Oil from a possible reversal at about $50, and short Silver from $16.83 which is also a key level. In the case of Crude Oil, $50 has the advantage of being a “psychological anchor”, and anyone looking at historical turning points for Crude Oil can see that big numbers such as $50, $75, $100 etc. have been more than coincidentally influential.

The problem with both trades is that the reversals are far from clear, and momentum has not slowed sufficiently yet. Looking at Silver, we have a large bearish outside candle, and the price has been unable to close above $16.83. These are encouraging signs, but we have had a new high within the past 24 hours. I would like to see a bullish pull back and another failure at or close to the $16.83 level before taking things to the next step.

XAGUSD

Turning to Crude Oil, the situation is a little more advanced in that we had the large bearish engulfing candle yesterday, and today we are experiencing, at least so far, a bullish retracement. This is good, but we are still some way from a verdict, as the bullish momentum has been strong here and probably needs some more time to turn around.

USOIL

The paired asset in both these potential trades is the U.S. Dollar, which has been in a long-term bearish trend. If this trend continues, it will probably be bad news for any short trades here, as we have a long USD component. What we really need is a reversal of this Dollar trend. As it happens, we may get such a reversal very soon, as Friday will bring a release of crucial Non-Farm Payrolls data. If the number comes strongly exceeding market expectations, we can expect the U.S. Dollar to advance against any assets beginning to weaken, so it is possible this event will be decisive in determining whether or not to enter.