Risking a nuclear war on SK or Japan is what any military action on NK means. Neither China nor US would want that. China specially would want to avoid this situation as it looks to build confidence in the Chinese system and establish itself as a super power. The super power status goes for a toss if the first impact of that is an unnecessary war and a war would mean that China loses its NK bargaining chip with US, Japan and SK . Secondly Xi is up for election on 18th October as the Congress convenes to decide on the Chinese President and a weak NK positioning would not help his cause. North Korea would want that US doesn’t push for a regime change and Kim John rules for eternity. That’s not very difficult for China to broker. What US (and allies) would want is disarming NK which is something NK would not agree to as that takes away the leverage NK has in the first place. Hence the complexity and therefore the solution is difficult but the can be kicked down the lane to be dealt with another day and I would think this kick would come well before the Chinese congress sits. Once the two sides go silent we should see a resumption of risk on sentiment across asset classes. Yesterday China sent a strong message to North Korea through its official media and also displayed its military might to the rogue ally through exercises near its border, all this happens as Chinese public opinion becomes more critical of NK actions.
Trump on the other hand used the hurricane to avoid a government shutdown until Dec 2017, an example of another can been kicked down the lane. The news was mildly dollar positive only as US10Y struggled to cross above 2.1% indicating that markets do not expect Trump to be able to pass tax reforms given his slow progress. Although debt ceiling issue being resolved for now creates a higher chance of the FED embarking on balance sheet reduction in the Sep FOMC. Today we have the ECB wherein recent history suggests that Draghi is not concerned about a rising Euro. A rising Euro for a current account surplus EU is any which ways a tighter financial condition scenario therefore it is likely that ECB would wait before announcing tapering. The strength in Euro is indicated by the fact that news of delay in ECB tapering has not been able to take Euro lower, basis which I would expect Euro to perhaps touch 1.21 post the ECB today.
KRW has appreciated 0.5% since yesterday along with all other EM currencies. USDINR should be between 63.50 and 63.85 basis recent EM currency movements. USDINR 1m NDF is only 4.5p left which indicates reduced selling pressure on USDINR. Asian equities are in the green as Korean markets shrug of fears of a war. I would expect USDINR to head towards 63.50 in the coming week basis the view that Korean issue will not escalate. CMP 64.02, Range 64.09-63.85.
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