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Tensions flare amid missile launch
Rush for safe-haven as North Korea fires missiles
Investors piled into safe havens on Tuesday morning amid rising global uncertainties. Firstly, last week comments from Donald Trump have heightened concerned about a potential government shutdown should the Congress keeps refusing to fund the wall along the southern border with Mexico. Even the arrival of Hurricane Harvey in Texas wasn’t enough to make Trump back off on his threat. Against such a backdrop, the US dollar extended losses with the dollar index breaking the 91.91 support (low from May 2016) to the downside. Normally, the greenback is considered as a “light” safe haven asset meaning that when uncertainty rises, the dollar depreciates against the Japanese yen and the Swiss franc at most. It seems now that Trump punches its weights on the USD.
The launching of ballistic missiles over Japan by North Korea also helped the CHF and the JPY to rise across the board. So far investors wrongly assumed that the North Korean situation was under control and that some negotiations were taking place behind closed door. The Swiss franc and the Japanese yen rose 0.90% and 0.75% against the USD. The yellow metal was also better bid as it climbed to $1,325 per ounce, up 1.15% on the day.
Despite the fact that the Trump and Kim Jong-un are keeping investors on their toes for longer than expected, we maintain our view that the USD is oversold. The question now is to determine how long this spike in uncertainty will last. Therefore investors will need to have patience and let the storm go by.
Gold bounces back
For the first time this year, gold has broken the strong resistance at $1300 and the precious metal is now standing around 1317$, its highest level since 2016. The summer was quiet but volatility is back due to the escalating tensions between the US and North Korea. We also believe that those tensions are not the only reasons for the gold surge. Economic reasons are also important. The US S&P 500 index went from 2480 to 2440 and it seems that investors become more reluctant to buy stocks at those elevated prices.
On top of that, we consider that the Fed made a clear U-turn by raising rates twice this year before stating that it was almost done with rate hikes. The US central bank went from hawkish to dovish. We recall that the Fed was expected to raise rates at least 3-4 times this year. Markets are now ruling out a rate hike before year-end.