Important Market Commentary

North Korean Missile Crisis - Dollar buckling under North Korea Threat

The Fed's balance sheet is a major threat

The Federal Reserve announced on Wednesday that it would start to unwind its $4.6 trillion balance sheet and kept interest rates unchanged. The latest announcement has caused a reaction from market experts that have commented that if the Fed was a financial institution it would be insolvent, also highlighting concerns that the Fed must bring balance sheet under control in order to maintain control over economic policy.

Currently the balance sheet is mismatched and is heading for trouble. The numbers show that the balance sheet has $4.5 trillion in assets, these are assets include $2.5 trillion in Treasury securities, $1.8 trillion in mortgage backed securities, and $0.2 trillion in other holdings like gold. The facts are that a rise in interest rates would cost the Fed too much money based on its mortgage backed securities, which they simply cannot sell and they must work towards bringing the balance sheet into a more liquid position.

Dollar buckling under North Korea Threat

On Friday, the dollar has buckled as tensions with North Korea rise. North Korean Foreign Minister Ri Yong Ho threatened that North Korea is considering a hydrogen bomb test on the Pacific Ocean, this followed leader Kim Jong Un’s statement that he will consider the “highest level of hard-line countermeasure in history” which was in response to President Trump's threat to destroy the isolated nation.

The USD's move lower was triggered by a reaction to the latest threats however there is a strategy traders will look to take advantage of. The yen usually benefits during times of crisis and there is an expectation that Japanese investors could return assets back to Japan, with the yen expected to rise.
So far today the dollar dropped 0.6 percent to 111.785 against the yen, safe-haven gold is also showing gains with spot prices up 0.5 percent at $1,297.11 per ounce, the Swiss franc rose 0.2 percent versus the dollar to 0.9687 and Asia stocks have slipped.

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