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Risk FX Recovers in Wake of Kim Jong-il Death

Last updated 12/19/2011 5:25 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Kim Jong-il leader of NK dies sparking selloff in risk
• EZ CA lower on seasonally adjusted basis
• Nikkei down -1.26% Europe flat
• Oil at $93.53/bbl
• Gold at $1597/oz.

Overnight Eco

• NZD NBNZ Business Confidence (DEC) 16.9 vs. 18.3
• GBP Rightmove House Prices (MoM) (DEC) -2.7% vs -3.1%
• EUR CA -7.5B vs. 2.2B

Event Risk on Tap

• USD NAHB Housing Market Index (DEC)

Price Action

• USD/JPY spikes to 78.20 on NK news but settles back below 78.00
• AUD/USD holds .9000 support .9950 caps
• GBP/USD tries to clear 1.5500
• EUR/USD holds 1.3000 in early Europe

The death of Kim Jong Il, North Korea’s enigmatic leader sparked a small selloff in risk at the start of week’s trade but by early European dealing markets had stabilized somewhat with EUR/USD holding above the key 1.3000 level. The passing of Kim Jong II the leader of one of the most secretive and repressive societies in the world,  sent regional bourses into tailspin as both South Korea and Japan went into high alert on fears of uncertainty in the transition. Kim Jong Il, who had been treated for "cardiac and cerebrovascular diseases for a long period," suffered a heart attack on Saturday, according to North Korea's official KCNA news agency. 

Although Kim’s son Kim Jong Eun is expected to succeed him, policymakers in the region are uncertain if the process will be peaceful and tension free. Kim Jong Eun  who is in his late twenties and has only been groomed for the position for less than one year is considered to be too inexperienced to fully assume the leadership role. North Korea is one of the most dictatorial societies in the world and its  military ambitions and nuclear tests have many of its neighbors including South Korea and Japan worried over the prospect of instability in the region.

The news initially sparked a massive sell off in equities during Asian trade with Australian ASX 200 dropping -2%  while the Nikkei was down -1.2%.The dollar rallied against both Korean won and the yen and risk currencies came under selling pressure with EUR/USD dropping through the 1.3000 handle while Aussie tumbled towards .9900. However as the Korean border has remained quiet for the past 50 hours with little military movement on the North Korean side, markets have started to settle down with risk assets performing better as we approach North American trade.

The economic  calendar was essentially barren today with only EZ CA and October construction output data on the docket. Not surprisingly both data points missed to the downside, but the market’s attention is fixated elsewhere as the broader issues of EZ fiscal coordination and the new geo-political uncertainties are the primary drivers of trade.

The North American calendar is similarly quiet with only the NAHB housing index and the Canadian Wholesale sales scheduled for today, leaving currency traders with no majors catalysts for now. One possible positive factor for the euro is the latest report that the Bundesbank remains in talks with the IMF on possible bi-lateral loans but on condition that the IMF submits a formal request to governments. Although the IMF has not yet made for any bilateral loan requests, the fact that Bundesbank continues to be open to the idea suggests that Germany may be somewhat more flexible on the issue  of further financial support for the EZ region.

Finally, the euro may also benefit from the extreme skew in positioning. The latest COT report from the CFTC shows that euro shorts are at 4 year highs with contracts exceeding 116K. Typically such extremes in positioning create conditions for sharp rebounds and given the thinness of pre-holiday markets the pair could quickly pop on any short covering rally taking out the 1.3100 level as the day progresses.  

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.