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Video / 29 August 2017 at 8:28 GMT

From the Floor: Escalation of N.Korea fears sparks flight to safety

#SaxoStrats
  • • North Korea ratchets up geopolitical tension by test firing missile over Japan
  • • N.Korean missile launch sparked flight to safety, including into gold, JPY, CHF
  • Damage estimates for tropical storm Harvey climb to $100 billion
  • • Gold finally took out resistance, upside focus now: $1,337 and $1,375/oz
  • • Oil lower on US demand drop, but cushioned by Libyan supply disruptions
  • • Gasoline remains bid as market tries the gauge impact of Harvey

Saxo Strats banner
By John Acher

North Korea test launched a ballistic missile over Japan's northern Hokkaido island into the sea early on Tuesday, prompting a stern warning from Japan and driving investors into perceived safe-haven assets, including the Japanese yen, gold and the Swiss franc.

The new North Korea missile launch stole the spotlight from the emergency efforts to cope with the flooding in Texas caused by tropical storm Harvey.

"This is obviously seen as a massive step up in terms of the degree of provocation," says Saxo Bank's head of FX strategy John J Hardy. "It was fired over land, which is a bigger deal than usual. "

"The key will be what Trump says when he wakes up," Hardy adds. "It’s a remarkable situation, and we all need to be careful here."

The heightened tensions fueled gains in the JPY, with USDJPY diving to "new local lows."

"Those did not hold overnight. For those to hold we would need to see this North Korea situation feeding into a general risk-off move,” Hardy says.

USDJPY plumbs new local lows as JPY gains on heightened geopolitical worries
USDJPY
Source:  Saxo Bank


Estimates of the damage from Harvey, which has caused catastrophic flooding in Texas, are reaching as high as $100 billion, and could affect the US debt ceiling debate, says Hardy.

Amid the worries about Harvey, the weaker US dollar, US president Donald Trump's political woes in Washington, a drop in real US yields on a dovish message at the end of last week from Fed chief Janet Yellen, and continued demand for safe-haven diversification, gold broke through key resistance at $1,300/oz on Monday, says Saxo's commodities strategy chief Ole Hansen.

"We can say that gold finally did take out resistance yesterday," Hansen says. "One of gold’s best friends this year has been Trump – his tweets and unpredictability."

The next initial target for gold is $1,337 and then $1,375/oz, while to the downside $1,295/oz needs to be support for any setbacks in the market, Hansen says.

The price impact of the drop in crude oil demand from refineries caused by hurricane Harvey is offset by supply disruptions, including in Libya, which are supporting oil prices.

"The market is probably not going to sell off in any major way as long as it is trying to gauge the impact [of Harvey and the Libyan disruptions]," says Hansen.

The S&P 500 index is still in a bearish trend on the charts, and Tesla's share price "is drawing some interesting triangle patterns," says Saxo Bank technical analyst Kim Cramer Larsson.
 

Oil storage tanks
 Oil storage facility. The price impact of lower crude oil demand from the shutdowns of US refineries is being offset by supply disruptions in Libya. Photo: Shutterstock


John Acher is a consulting editor at TradingFloor

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