INR update: Nuke tests largely ignored by markets

With what happened with Gadaffi in Libya or Saddam in Iraq or Asad in Syria (ongoing), North Korea has learnt that an actual nuclear arsenal and threat is the only way it can avoid a regime change at the hands of the US. A threat of an actual nuclear attack would prevent the US from taking any military action against NK as it's allies Japan and SK would never risk a nuclear attack. Thus the nuclear test can only push China to review its decades old NK policy which is of maintaining the balance of power in the Korean peninsula by avoiding US intervention in NK. China has been helping NK economy by going around the sanctions in one way or the other and the testing of hydrogen bomb can only lead to NK loosing it's ally which makes it significant. The world knew that NK had nuclear weapons so yesterday was no surprise but only to the extent that NK is more provocative than China might like. So if anything the testing can be risk positive as it pushes China to side with the rest of the world. Trump is perhaps insignificant in the entire scheme of things after his bluff was called by NK.

 

US data continues to point at robust growth but without price pressure. The ECB news of postponing tapering to Dec 2017 and discomfort with higher Euro would get further clarity in the ECB meeting on Thursday. Overall if the main reason for Euro appreciation is reserve money allocation, then short term data and minor ECB actions would have little impact and the dips will continue to be shallow. This is a data heavy week as well with EU GDP, EU retail sales, US factory order tomorrow.

 

CHF indicates mild risk off because of NK. JPY might not be a good indicator of NK related risks. USDINR 1m NDF is trading 6p left. USDINR spot offshore had gone towards 63.80 on Friday night so we have already seen a 15p upmove. KRW has depreciated to 1130 from sub 1120 levels, other than which other EM currencies have not depreciated significantly. CNH continues to appreciate. Equity markets indicate mild concern only with Korea at -0.8% while other markets are largely flat. CMP 63.96, Range 64.05-63.90. I would continue to sell on upticks and if someone wants to protect against the tail event of a war then buying puts would be a better strategy.