Summary:

• North Korea fires a ballistic missile over Japan
• Gold, yen surge as investors shun risk
• USDJPY could create a buying signal if today’s candle closes in the green

It looks as if markets got used to North Korean threat. Even though the news of Korean rocket test that breached the Japanese territory provoked a major reaction with the yen surging as much as 1% at first, a good part of it has been already reversed as traders seem to count on a temporariness of this risk once again. Could it be different this time around?

A trajectory of Korean missile. Source: Marketwatch 

It seems like Kim Jong Un is taking another step in his attempt to test determination of global leaders. Pressed by a round of fresh sanctions, this time backed by China, the North Korean leader is clearly not in a mood to back off. His regime fired a ballistic missile over Japan for the first time since 2009. The Chief Government Spokesman Yoshihide Suga said it was “unprecedented, grave and serious threat to Japan” but it is very unclear what comes next. We know that there is lack of agreement among key decision makers in the US what to do with Un and increased pressure on Japan may lead its government closer to backing some sort of intervention. 

This uncertainty is taking its toll on the markets: yields of the US 10-year bonds have been in a decline anyway and this incident only accelerated the move, taking them to just 2.12%, levels close to this year’s lows against 2.60% that we saw as recently as March. This in turn propelled yen and gold prices higher. 

Gold prices paved the way higher by breaking the key $1295 zone. Source: xStation5 

The gold market is especially interesting as we’ve seen the bulls crushing the $1295/oz zone with force yesterday so the news found a very supportive ground here and took the prices to $1324/oz at one point. Even if we see a retest of a broken zone it now could serve as a support. 

Tuesday could be critical for USDJPY as bulls try to recover from the main support zone. Source: xStation5 

Meanwhile with the yen a direction is not so obvious. We saw a major decline on USDJPY over the summer but the pair is now at the key support of 108.25 and while we saw a test of this level with an initial reaction, bulls managed to bounce back and could actually produce a buying signal if they manage to close today’s candle in the green. A lot will depend on a potential escalation of this phase of the conflict and investors will undoubtedly await a reaction from global leaders today.