Ignore him “he’s just attention seeking”
In the same way as a naughty child who wants to be the centre of attention, despotic North Korean Leader Kim Jong-un just needs a little discipline. Chinese President Xi Jinping acting as a kindly uncle wants to ask him just what it is what he wants. It is unlikely to be the destruction of his country and its people.
Rex Tillerson the US Secretary of State commented yesterday that despite Kim’s continued threats the situation for the US has “barely changed”. President Trump is not going to allow a rogue nation to build a nuclear capability which can reach the US mainland. Defense Secretary, however, left Kim in no doubt about what to expect. He was the most “hawkish” of his colleagues stating that Kim risks “regime change and the destruction of his people”.
The Swiss Franc caught up with its “risk off” partner, the JPY, yesterday rising by close to 1.5% versus the dollar in its largest move in 2 ½ years. The JPY has gained close to 4% since the tensions increased again and is now hovering close to 110.00.
Meanwhile back in the real world
Economic activity, politics and monetary policy continue to be the prime drivers of currency activity. This has, so far, been an interesting summer. Ranges have been relatively narrow and trends have remained intact but the underlying forces have brought challenges for traders and Central Bankers alike.
The Bank of England is faced with rising inflation (next week’s data could easily mark the return to close to 3%) and a slowing economy. Governor Mark Carney remains of the opinion that this is solely due to the fall in sterling since the Brexit referendum. Given the marked lack of economic activity that is almost certainly the case. Wages aren’t rising and have turned negative. Activity indexes are turning south although PMI’s still indicate expansion (for now).
Euro strength is starting to influence both inflation and exports. That illustrates perfectly the role played by currency in the economy. The pace and degree of change play havoc with monetary planning. It is highly unlikely that a close to 15% rise in the value of the euro was a central plank of ECB planning back in January.
Rate hikes in the US have, so far, failed in their prime objective. No, it wasn’t to dampen an economy in danger of overheating or inflation that was close to out of control. It was to take the steam out of the stock market. It seemed to have worked as the pace of increase slowed but since rates appear back on hold it has taken off again making new highs on a regular basis. A very shallow correction over the past few days has eased concerns a little but with Americans continually looking for value (although a DJI over 21,000 doesn’t appear to provide much), avenues for a decent return are few and far between.
US Inflation data to determine short term direction for dollar
It is far easier to plot a path for a currency when studying economic data than it is looking at concerns over the start of a war! For that reason, traders will study price data being released in the US over the next couple of days with interest.
Factory gate prices are set to rise as the dollar’s fall over the first half of the year are factored in. Producer prices likely rose by close to 2.5% in July with consumer prices, released tomorrow, inching closer to the 2% threshold that is acceptable in developed economies.
It is hard to say that a Central Bank as proactive as the Fed is on hold for the rest of the year and Janet Yellen's call on rates will likely determine whether she is “invited back” for a second term as Chairman in January. Unpredictability is the name of the game as President Trump, who will make the decision on Yellen, is as unpredictable as the data, although he is mainly responsible for any volatility.