Last Wednesday, The Reserve Bank of New Zealand left interest rates unchanged, as expected, at 1.75%. The NZD lost 1.34% of its valve last week not because of US/North Korea tensions but rather through some good old fashion central bank jawboning. The only other currency that saw an outright move was the NZD. We don’t want to downplay the tensions but we also don’t want to play it up either – the threat of something happening is high especially after North Korea’s threat to shoot some missiles into the waters off Guam as a display of force on August 15 th Military officers were killed by North Korean forces in 1976, and the September 11 attacks of 2001. DEFCON 3 was reached during the Yom Kipper War of 1973, Operation Paul Bunyan after two U.S. DEFCON 2 was reached during the Cuban Missile Crisis of 1962 and the Gulf War of 1991. In fact, in its 33 year history, the warning levels have only changed five times. To be clear, despite all of last week’s escalating tensions, the US remains in DEFCON 5, the lowest state of readiness (normal). For those of you that don’t know, DEFCON is an alert state used by the United States Armed Forces – it recommends five graduated levels of readiness (or states of alert) for the U.S. With the onset of the war rhetoric, said investors got nervous (as they should be) and sold their investments and bought JPY and CHF in order to return the borrowed funds to the creditor.īy the way, I went for a little sensationalism by naming this piece DEFCON 5. You see, because Japan and Switzerland have the lowest interest rates in the world (they’re actually negative), investors borrow funds in these currencies and convert them (sell them) to invest in other countries. The moves into JPY and CHF were actually the reversal of risk on trades, i.e. The only real safe haven flow was into gold, which was up 2.4% on the week. Most media pundits mistakenly labelled this move as safe haven flows. The escalation of threatening rhetoric from both sides drove the Japanese Yen and Swiss Franc higher. and North Korea was the key driver in currency movements this past week. The escalation of tensions between the U.S. I was all set to pen this newsletter about how the currency market was going into snooze mode (dog days of August) for the rest of the month till the annual policy symposium at Jackson Hole on August 24-26 - until, you guessed it, President Trump's "fire and fury" threat.
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