Japanese Yen and Swiss Franc Gap Up as North Korea Significantly Scaled Up Military Threat

Yen and Swiss Franc gap up as the week starts while Dollar and Aussie trade broadly lower. Nikkei tumbles in early trading and is down -170 pts at the time of writing. Gold resumes recent rally and surges to as high as 1343.5. Korea tension resurfaces as North Korea conducted a sixth nuclear test on Sunday. It’s believed that this one, an advanced hydrogen bomb or a long-range missile, is of a significantly larger scale and more powerful, as an Pyongyang described the underground explosion in a televised statement that it’s a "perfect success in the test of a hydrogen bomb for an ICBM". And, "the creditability of the operation of the nuclear warhead is fully guaranteed." It’s even claimed that the detonation of the bomb triggered an initial magnitude 6.3 earthquake in the northern part of North Korea. The United Nations Security Council was set to meet later on today to discuss fresh sanctions against the country.

US Defense Secretary James Mattis had a meeting with President Donald Trump, Vice President Mike Pence and other top national security advisers. Mattis briefed Trump on each of the "many military options" and warned of a "massive military response, a response both effective and overwhelming" to any threat from North Korea. Trump condemned that the "words and actions" of North Korea "continue to be very hostile and dangerous" to the US.

US Trump: South Korea appeasement will not work

Trump also named other countries in his tweets regarding the issue. He said that Pyongyang "has become a great threat and embarrassment to China, which is trying to help but with little success." Trump also warned that the US is " is considering, in addition to other options, stopping all trade with any country doing business with North Korea." That clearly refers to China, which continue to be a key economic partner of North Korea despite supporting the economic sanctions. Besides, Trump also said that "South Korea is finding, as I have told them, that their talk of appeasement with North Korea will not work, they only understand one thing!" Trump also hinted at withdrawing from the US-Korea Free Agreement agreements earlier.

South Korea: Destruction of war should not be repeated in this land

Taking about South Korea, President Moon Jae-in’s office issued a statement emphasizing that "South Korea is a country that experienced a fratricidal war. The destruction of war should not be repeated in this land". And Moon pledged that "we will not give up and will continue to push for the denuclearization of the Korean Peninsula through peaceful means working together with our allies." The country said today that it’s preparing fresh military drills with US in response to situation. And it’s reported that President Moon, initially opposed the so called Thaad (terminal high-altitude area defense) system, appears to have soften his stance. And South Korea is poised to approve further deployment of the US Thaad system.

Japan Abe talked twice with Trump during the weekend

Japan’s prime minister Shinzo Abe held two phone calls with Trump discussing the situation. Abe told reporters after the call that "President Trump and I shared the view that we cannot overlook North Korea’s reckless act and that the international community must show its resolve by applying stronger pressure than had so far been used". Separately, Abe seemed to have agreed with "Russian President Vladimir Putin to cooperate on North Korean as both agreed that "North Korea’s reckless act is a serious threat" 

Elsewhere

Japan monetary base rose 16.3% yoy in August. Australia TD securities inflation rose 0.1% mom in August. Australia company operate profits dropped -4.5% qoq in Q2. Eurozone will release Sentix investor confidence and PPI in European session. UK will release construction PMI. US and Canada will be on holiday today.

Three central banks to meet this week: RBA, BoC, ECB

Looking ahead, we have a busy week ahead. Besides the BOC meeting scheduled on Wednesday, we have the RBA meeting on Tuesday and the ECB meeting on Thursday. The strong GDP data from Canada lifted the chance of a rate hike by BoC this week to 50%, according to overnight index swaps market pricing. However, considering that BoC has just raised interest rate by 25bps to 0.75% back in July, September seems to be too early for another move. Nevertheless, Canadian Dollar would likely stay firm at the initial part of the week. And buying will jump in again if BoC signals in the statement that it’s ready to move again in October.

There have been rumors that the ECB would delay its QE tapering due to the recent rally in the single currency. Indeed, the late selloff in Euro last week was due to report that ECB would not act until December. However, we believe euro’s strength of late has more been due to the unattractiveness of other currencies, especially the greenback and sterling. We expect the ECB to warn of euro’s strength but maintain the rhetoric that it stands ready to extend/expand asset purchases, if needed. The central bank might begin formal discussion in October.

Throughout the week, we would be receiving a number of speeches from Fed presidents, beginning with Governor Brainard, Minneapolis’ Kashkari (voter) and Dallas’ Kaplan (voter) all speaking on Tuesday, followed by Cleveland’s Mester (nonvoter), New York Fed President Dudley and Kansas City’s George (nonvoter) on Thursday and Philadelphia Fed President Harker (nonvoter) on Friday.

Here are some highlights for the week ahead:

• Tuesday: RBA rate decision; Swiss GDP, CPI; Eurozone PMI services revision, retail sales; UK PMI services; US factory orders
• Wednesday: Australia GDP; German factory orders; Eurozone PMI retail; Canada trade balance, labor productivity, BoC rate decision; US trade balance, ISM services, Fed Beige Book report
• Thursday: Australia retail sales, trade balance; Japan leading index; Swiss foreign currency reserves; German industrial production; ECB rate decision; Canada building permits, Ivey PMI; US jobless claims
• Friday: New Zealand manufacturing activity; Japan GDP; China trade balance; Australia home loans; Swiss unemployment; German trade balance; UK productions, trade balance; Canada employment

GBP/JPY Daily Outlook

Daily Pivots: (S1) 142.16; (P) 142.57; (R1) 143.20; More

GBP/JPY gaps lower today but stays in range of 141.40/143.18. Intraday bias remains neutral first. Deeper decline is mildly in favor as long as 143.18 resistance holds. Below 141.40 minor support will turn bias back to the downside first. Break of 139.29 will target 135.58 key support level. At this point, price actions from 148.42 are seen as a sideway consolidation pattern. Hence, we’ll expect strong support from 135.58 to contain downside and bring rebound. Meanwhile, break of 143.18 will indicate short term reversal and turn bias back to the upside.

In the bigger picture, the sideway pattern from 148.42 is still unfolding. In case of deeper fall, we’d expect strong support from 135.58 and 50% retracement of 122.36 to 148.42 at 135.39 to contain downside. Medium term rise from 122.36 is expected to resume later. And break of 38.2% retracement of 196.85 to 122.36 at 150.43 will carry long term bullish implications. However, firm break of 135.58/39 will dampen the bullish view and turn focus back to 122.36 low.

Economic Indicators Update