Yesterday, South Korea went on a high state of alert after tensions escalated with North Korea on Yeonpyeong Island. The news is that North Korea fired at least 200 artillery shells (don't ask me how they were able to count that), which killed 2 South Korean soldiers and injured 14.
In response, South Korea's military shot around 80 artillery shells while also deploying F-16 fighter jets. As scary and surprising as it was, the event didn't come out of the blue--the two nations have had a history of clashes.
In March, a South Korean warship was sunk, and although not proven, the South Korean government believes the North did it. Shortly after, during May, North Korea's military was put on active alert, prompting the South Korean government to cut all ties with them.
Then, in July, South Korea and the U.S. did some naval exercises, which made North Korea believe that they were prepping up for an invasion. A couple of days ago, North Korea revealed that it has a new uranium enrichment facility, which suggests that it might expand its nuclear arsenal.Geez Louise, the whole thing sounds like a mission from Call of Duty.
But the thing is...
Dis sheez forealz son!!!
The clash that took place in East Asia created blasts that were heard worldwide and rocked forex markets.
Following the immediate break of the news was a sharp decline of the yen, probably because of Japan's proximity and close ties with South Korea. But risk aversion eventually caught up with the markets as the day wore on and the news hit mainstream media.
Naturally, investors fled away from "riskier" assets and banked their money in safe haven assets. What followed were massive gains (think Big Pippin's ego massive!) across the board for both the yen and dollar, the kings of risk aversion.
True to its form as a "barometer of risk," EUR/JPY took the biggest blow and dropped almost 300 pips in response to the news. Just in case you haven't read through the School of Pipsology's lesson on the pair, we treat EUR/JPY as THE number one barometer of risk because it has shown a high correlation with stock markets through the years.
The Aussie dollar also suffered a huge selloff since the tension in Asia spelled doom for Australia's exports.But if you think yesterday's artillery fire between North and South Korea is enough to push euro zone's debt woes out of the spotlight, think again.
Although the tension in Asia gave traders more reason to keep buying safe haven currencies, it probably was just icing on the risk aversion cake. And now it seems that traders have had their sweet fix and started focusing on the usual risk aversion culprits again.
Aside from that, investors could shift their attention back to the top-tier economic reports scheduled to come out. As I mentioned a few days ago, the U.S. is taking center stage the entire week and it is set to release durable goods orders, new home sales, and initial jobless claims data soon. You can check out our forex calendar to know the exact time of publication of the reportst!
Given how risk aversion has been dominating the markets as of late, worse-than-expected results could result in a much more pronounced selloff than what we have seen so far. Bear in mind that sentiment can always shift on a dime though, so stay sharp!
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