Yen Surges as North Korea Fired Missile Over Japan

Yen surges broadly, together with Swiss Franc, on risk aversion as tension in the Koreas escalates again. North Korea fired a missile earlier today that flew over Japan and landed in the Pacific Ocean. South Korea military official said that the missile was fired around 5:57 a.m. local time, flew for about 2700 km and reached a maximum altitude of 550 km. US Pacific Command projected that the missile splashed down at around 6:29 a.m. local time. The news sent Yen higher as investors there repatriates their overseas investments on fear of market and exchange rate volatility. USD/JPY dives through 108.59 support to as low as 108.33 and recent selloff resumes. Commodity currencies are hit hardest while Euro is mixed. The news also sent gold sharply higher to 1330 after it takes out of 1300 handle firmly yesterday.

Japan PM Abe: Unprecedented, serious and significant threat

In Japan, public television programs were interrupted with warnings regarding the threat to the country. Several bullet train lines were halted. Similar scale of provocative act was not seen since after 2009. And, it’s only the third projectile the fly over Japan since 1998. Japan Prime Minister Shinzo Abe condemned that "this reckless act of firing a missile over our nation is an unprecedented, serious and significant threat, one that seriously diminishes the peace and safety of the region, and as a result we have lodged a firm protest against North Korea." Abe also requests an emergency meeting of UN Security Council to see to "further strengthen pressure against North Korea."

US President Trump warned of pulling out from NAFTA

In the US, President Donald Trump stepped up his rhetorics on the relationships with Canada and Mexico. Trump tweeted that "we are in the NAFTA (worst trade deal ever made) renegotiation process with Mexico & Canada". And he told reporters that "I believe that you will probably have to at least start the termination process before a fair deal can be arrived at. In our opinion, the core of NAFTA renegotiation is to narrow US’ trade deficit. With US’ trade deficit with Canada on the fall, it would put harder pressure on Mexico in the negotiations.

The market reaction towards NAFTA renegotiation has been muted, overshadowed by other events including North Korean peninsula tensions, US debt ceiling, and central banks’ monetary policy outlook. Indeed, we do not expect to see material developments for the rest of the year. However, the parties, especially the US and Mexico, would be eager to complete a deal by mid-2018, ahead of and Mexican election in July and US mid-term election in November." More in Second Round of NAFTA Renegotiation to Begin…

EU Barnier urged UK to start "negotiating seriously"

As the third round of Brexit negotiation starts, EU’s chief negotiator Michel Barnier urged UK to start Michel Barnier urged the UK to start "negotiating seriously" as "to be honest, I am concerned. Time passes quickly." He welcomed the papers published by the UK government’s papers published before the meeting. But Barnier emphasized that "we need UK positions on all separation issues" to make "sufficient progress". He added that "we need UK papers that are clear in order to have constructive negotiations and the sooner we remove the ambiguity, the sooner we will be in a position to discuss the future relationship and the transitional period."

On the other hand, UK’s Brexit Secretary David Davis urged "flexibility and imagination on both sides". He reiterated that "our goal remains the same: we want to agree a deal that works in the best interests for both the European Union and the United Kingdom and people and businesses right across Europe. We’re ready to roll up our sleeves and get back to work once more." Davis also depended UK’s papers as "product of "hard work and detailed thinking that has been going on behind the scenes"

On the data front

Japan unemployment rate was unchanged at 2.8% in July, household spending dropped -0.2% yoy. UK nationwide house price, German Gfk consumer confidence and French GDP will be featured in European session. Canada IPPI and RMPI, US S&P Case-Shiller house price and consumer confidence will be released later in the day.

USD/JPY Daily Outlook

Daily Pivots: (S1) 109.04; (P) 109.23; (R1) 109.43; More…

USD/JPY’s decline resumed by taking out 108.59 and reaches as low as 108.33 so far. Intraday bias is back on the downside for 108.12 low. Whole corrective decline from 118.65 is possibly resuming and break of 108.12 will target 61.8% retracement of 98.97 to 118.65 at 106.48. Nonetheless, considering bullish convergence condition in 4 hour MACD, break of 109.83 will indicate short term bottoming and turn bias back to the upside for 110.94 resistance and above.

In the bigger picture, the corrective structure of the fall from 118.65 suggests that rise from 98.97 is not completed yet. Break of 118.65 will target a test on 125.85 high. At this point, it’s uncertain whether rise from 98.97 is resuming the long term up trend from 75.56, or it’s a leg in the consolidation from 125.85. Hence, we’ll be cautious on topping as it approaches 125.85. If fall from 118.65 extends lower, downside should be contained by 61.8% retracement of 98.97 to 118.65 at 106.48 and bring rebound.

Economic Indicators Update