Another day, another escalation in the war of words. North Korea’s foreign minister Ri Yong Ho said that the recent aggressive moves by the US constitute a “declaration of war”. He added that North Korea has the right to attack American “strategic bombers” also outside North Korean airspace.

We have not heard this heightened rhetoric before, but we did have quite a few escalations in the tensions. These included missile firings over Japan, tests of nuclear bombs and lots of threats. A threat that remains open is one to test a nuclear bomb in the Pacific, rather than underground on North Korean soil.

Also, the US contributed to the verbal escalation with threats and mockery from Trump. He called Kim Jong-un “Rocket Man” and said he would “destroy” North Korea if needed.

Market reaction

Each time we had an escalation, it triggered a sell-off of USD/JPY. The yen is a safe-haven currency that rises in times of trouble, even if the trouble is related to Japan.

The yen indeed gained, with Dollar/yen falling from around 112.20 to 111.50. The reaction was wider and included other yen pairs. In addition, the US dollar strengthened against some of its peers, stocks dropped and gold is higher.

The next move is usually a correction. The drop in USD/JPY is followed by a gradual rise and a return to previous levels. The attention span is short and the scary headlines become old news.

Is this another opportunity to buy the dips? 

One difference is that the North Korean threats come amid the US session and not early in Asia. So, US stock markets react more than usual. But this does not mean a different overall pattern: a drop on the frightening news and most probably, a gradual recovery as another escalation is not imminent.

What do you think?