Forex markets: North Korea tensions remain high as USD/JPY tends to depreciate marginally, when North Korea engages in military action and the reactions tend to be more significant.
North Korea conducts nuclear tests, explained analysts at Nomura who also that, historically, forex markets tends to depreciate the most when North Korea conducts nuclear tests.
After Kim Jong-Un rose to power, North Korea conducted three nuclear tests, and the forex markets also reacted negatively on August 8th, when North Korea reportedly succeeded in creating a miniaturized nuclear warhead.
On average of four incidents, forex depreciated by 0.4% on the day of the incident and by 1.1% over the three days following the incident.
Thus, forex markets will likely remain nervous for the time being, especially until 9 September. Geopolitical concerns will exert downside pressure on yen-crosses for the time being.
“After recent media reports, the risk of another nuclear test by North Korea may be already priced in, at least partially. Thus, the reaction of USD/JPY to a nuclear test would not be prolonged, while responses from the US administration would be important.”
“If tensions rise further and JPY keeps appreciating solely owing to geopolitical risks, verbal interventions from Japanese authorities would likely be forthcoming.”