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Flee to Safe Havens on Heightening North Korea Crisis Print E-mail
ONG Focus | Insights | Written by Oil N' Gold | Thu Aug 10 17 00:37 ET

Precious metals and safe- haven currencies (such as Japanese yen and Swiss franc) shone as Korean Peninsula tensions intensified. After UNSC passed sanctions on North Korea with a 15-0 vote over the weekend, US President Donald Trump and North Korean leader Kim Jong-un threatened each other of war. Following Trump's comment that North Korea would "be met with fire and fury like the world has never seen", North Korea responded by threatening to fire a missile at Guam. The latest comment by Trump was that the US nuclear arsenal is "more powerful than ever before" without taking in account the fact that the country has scaled back its nuclear arsenal since the 1980s. Ending a 6-day decline, gold jumped to a 2-month high of 1277.8 before ending the day at 1273, up 1.32%. Silver extended the gain for a second day, adding +2.9% at close. Energy prices climbed higher, more driven by the huge draw in inventory, than by geopolitical tensions. The front-month WTI crude oil contract added +0.79% while the Brent contract was up +1.07% for the day. Diminished risk appetite also sent safe-haven currencies higher. Extending the weakness on Asia Thursday, USDJPY fell to a 3-month low of 109.53 on Wednesday, before setting at 110.06, down -0.22%. Meanwhile, Swiss franc also strengthened, paring almost half of the losses made against the euro over the past two weeks.

UN's latest sanctions on North Korea include banning the hermit Kingdom's exports of coal, iron, lead and seafood. We doubt the effectiveness of the measures in curbing North Korea's nuclear ambition. Indeed, there are various ways that the country supports its military developments financially. Besides exports, of which coal accounted for 40% and generated US$40M/ month since 2015, the country is sending thousands of forced labors to China, Russia and the Middle East for mining, logging, textiles and construction works. It is also keen on trading prohibited weapons and drugs. Moreover, it is believed that China, Russia and North Korea, the main communist allies, continue to trade via other unreported channels, breaching the sanctions invisibly.

On oil inventory the EIA reported that total crude oil and petroleum products stocks decreased -4.61 mmb to 1311.77 mmb in the week ended August 3. Crude oil inventory plunged -6.45 mmb to 475.44 mmb with stocks dropping in 4 out of 5 PADDs. PADD 3 alone showed a -4.09 mmb decline for the week. Cushing stock added +0.57 mmb to 56.37 mmb, while utilization rate added +0.9% to 96.3%. For refined oil products, gasoline inventory gained +3.42 mmb to 231.1 mmb but demand was down -0.46% to 9.8M bpd. Production increased -0.06% to 10.3M bpd while imports rose +101.82% to 1.11M bpd during the week. Distillate inventory decreased -1.16 mmb to 147.69 mmb as demand gained +8.94% to 4.51M bpd. Production added +1.4% to 5.31M bpd while imports plunged -62.04% to 0.04M bpd during the week.

On central bank developments, RBNZ expectedly left the OCR unchanged at 1.75%. Governor Wheeler reiterated that the monetary policy would remain accommodative for some time. The staff projection continued to forecast the first rate hike to come in 2H19. They also revised lower the short term inflation outlook and intensified the warning that a lower currency is needed for growth. NZDUSD jumped to a 3-day high of 0.7371 after the announcement, but gains were erased afterwards. The focus today is on US' PPI report with the headline reading probably staying unchanged at +2.2% y/y in July and the core reading improving to +2.1% y/y from +1.9% in June.

 

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