Who knew Ozzy Osbourne was a fortune teller? If you have ever seen the reality TV series “The Osbourne’s” you would know that the former Black Sabbath front man could barely tell the time, let alone tell the future.
Yet his 1980 song, “Crazy Train” is an apt description for President Trump and Supreme Leader Kim Jong-un’s dialogue. It’s “goin’ off the rails on a crazy train.”
President Trump has been described as “thin-skinned” about 332,000 times according to Google. And North Korea’s Kim Jong-un got under it.
North Korea has been threatening its neighbor’s and the United States for years while striving to develop nuclear missile capabilities. They have been making progress. On July 4th, they successfully launched a ballistic missile that theoretically could hit Alaska. Kim Jong-un said it was a gift to “American bastards.” They did again on July 28th and “experts” said that the missiles have the range to hit major US cities.
Each missile test was accompanied by veiled and not-so veiled threats which spooked the United Nations. On August 5, they levied a new round of sanctions against North Korea. Even China signed on.
The sanctions included a ban on all North Korea exports of coal, iron, iron ore, lead, and seafood. It also banned the country from increasing the number of foreign workers that it sends abroad
The UN sanctions irked Kim Jong-un. A government statement carried in the official Korean Central News Agency said the sanctions were a “violent violation of our sovereignty.” They also said “We will not put our self-defensive nuclear deterrent on the negotiating table” while it faced threats from Washington, and will never take a single step back from strengthening our nuclear might”
On August 9, President Trump’s “shoot from the lip” diplomacy was on full display.
He said “North Korea best not make any more threats to the United States. They will be met with fire and fury like the world has never seen… he has been very threatening beyond a normal state. They will be met with fire, fury and frankly power the likes of which this world has never seen before.”
Not to be outdone, the self-proclaimed “Great Leader, Father of the People and resident nutbar of the Paektu Mountains issued his own rebuttal. The state run Korea Central News Agency said that North Korea was considering a missile strike on the US Pacific Territory of Guam.
Those words got the attention of FX markets. Safe haven currencies were in demand. The Swiss franc and the Japanese yen rallied as did the US dollar.
That trend looked like it would continue during the August 9 New York session until US Secretary of State Rex Tillerson acted like the adult in the schoolyard.
He said “I do not believe there is any imminent threat, in my own view.” He later added “Americans should sleep well at night. I have no concerns about this particular rhetoric over the last few days.”
He also defended President Trump’s message saying “ “What the president was doing was sending a strong message to North Korea in a language that Kim Jong Un would understand, because he doesn’t seem to understand diplomatic language.”
Those words were a soothing tonic to jittery traders and a large part of the safe-have flows were reversed.
It wouldn’t be too much of a stretch to conclude that the entire Trump/North Korea episode was far more of the tempest/teapot variety rather than the Doomsday clock striking 11:59 pm.
Trump’s comments merely lit the fuse to an FX market looking for an excuse to buy US dollars.
Short US dollar positioning was stretched and getting stale. The stage was set or an overdue correction.
Many market participants were on vacation (still are) and it is a safe guess that the majority of those vacationers are the more senior/experienced employees.
There haven’t been any major US economic releases during this week and there aren’t any scheduled until Friday’s inflation data.
That helped to explain the price swings but it was the media that fanned the flames. All the major news outlets trotted out retired generals to boast about America’s nuclear capabilities. Defense Secretary James Mattis threatened to destroy North Korea.
He said “The DPRK should cease any consideration of actions that would lead to the end of its regime and the destruction of its people.”
The US administration needs to take a “time-out.”
We’ve seen this movie before. Who can forget the Secretary of State Colin Powell on TV, outlining the case for invading Iraq. The US decided that they had to remove Saddam Hussein from power because he was building and using “weapons of mass destruction.” None were ever found.
The Americans greatly exaggerated the Saddam Hussein regime’s capabilities and by the time they were finished left Iraq and the rest of the world worse off than it was before. Why will they be more successful with North Korea?
FX markets are fickle and finicky. They are constantly changing price direction, on shifting economic data loyalties while demanding precision in economic forecasts. Deviations from the forecast can exact a heavy toll on a currency. Yet traders are fine with fickle and finicky. The problem is with flip-flopping central banks and/or lately, unfiltered politicians.
President Trump’s hyperbole and bluster have led to large (but short-lived) currency price swings due to his penchant for inflammatory comments. FX traders are merely passengers on a crazy train going of the rails and Donald Trump is the engineer.
