The Armageddon Trade
The geopolitical fear trade lifted off Wednesday in a classic flight to CHF, JPY and gold on North Korea worries. The Swiss franc led the way, while the Australian dollar lagged. Early in Asia-Pacific trade, the RBNZ held rates while the kiwi fell sharply when the assistant governor McDermott accentuated the change in the language that the currency "needed to" weaken. US PPI and Fed's Dudley are due next. All 3 Premium index shorts are in the green.
Markets are an unparalleled price discovery mechanism, except in once case. Add a bit of fear into the equation – especially fear of life and death – and markets overreact. Recent examples are the trouble in Ukraine and the ebola episode.
War is naturally frightening and uncertain. Now that North Korea has nuclear weapons (or close to it) it will remain a part of the trading landscape. Expect that to provide several opportunities to fade the "fear trade". The first came on Wednesday as stocks and USD/JPY fell only to later recover most of the dip. Bids in bond and gold mostly remain but once the rhetoric cools, so will the trade.
Fading armageddon rests on two critical assumptions: 1) That the US will obliterate North Korea if it uses nuclear weapons. 2) That Kim Jong-Un values his life.
The only conclusion is an extended stalemate, which is really just a continuation of the status quo since the end of the Korean War. The media thrives on inspiring fear but the best trade is almost always on the other side so expect that to remain the case for North Korea.
A more traditional trade is ongoing in the New Zealand dollar after rates were left unchanged at 1.75% and Wheeler said they would remain there for the foreseeable future. But 8 hours later, NZD/USD later fell by anotehr half a cent when McDermott stepped in.