Trump Effect: U.S. & North Korea Summit Should Provide Big Impact on Currency Markets - Especially in Asia


The pot is boiling on the “on again and off again” summit between U.S. President Trump and North Korean leader Kim Jong Un, and its impact on global foreign currency markets.

The summit, which is tentatively scheduled to take place June 12th in Singapore, gives both political leaders a chance to get what they want. President Trump wants to go down in history for de-arming the country's nuclear weapons and brokering a peace agreement between South Korea and North Korea. Meanwhile, Kim Jong Un has more short-term targets – sanctions relief and economic solvency.

That scenario sets the table for various currency-effecting factors which bear examining one at a time:

North Korea wants to fend off a currency crisis.
If the current sanctions against North Korea by the U.S. remain in place, Kim Jong Un and his economic advisors fear a full-blown currency crisis. There's a real risk that North Korea could see its hard currency inventory thin out after being used to finance trade deficits with foreign countries (most notably China, its largest trading partner.)

Currently, North Korea bears a $1.7 billion trade deficit with China, as of 2017 , about twice the size of the country's normal trade deficit with the Chinese. That booming deficit has forced North Korea to turn to its foreign currency reserves (pegged at between $3 billion and $13 billion) to foot the China bill, estimated to be about $150 million per month. If Uncle Sam turns up the heat on sanctions, economists fear the North Korean currency may free fall from panic selling, putting the entire country's economy in peril.

     Any deal that brings peace between
     North Korea and South Korea should
     boost the won significantly.

South Korea's currency in peril, too.
Any failure by the U.S. to eliminate North Korea's nuclear arsenal could lead to heightened risk of war with South Korea, a scenario that would grow from a 35% chance of occurring to 50%, according to Nomura analysts. That threat has battered South Korea's won (USD/KRW 1,071.19) in recent months, and will likely continue to do so unless the nuclear arsenal threat is taken off the table. Conversely, any deal that brings peace between North Korea and South Korea should boost the won significantly. Nomura pegs the U.S. dollar to be valued at $1,140 against the won by the end of the year, and also predicts the won's value could fall by 10% or more if a deal fails to materialize and North Korea launches military action against South Korea.

     Japan is the world's second-largest
     owner of foreign assets and the yen
     historically performs  well amidst
     bouts of geopolitical strife.

Japan – safe haven or North Korea target? 
Once again, the biggest foreign currency effects of the proposed U.S. and North Korea summit favor countries close to North Korea – in this case Japan. The Japanese yen has long been considered a safe haven when North Korea begins to rattle sabers and talk of war heightens on the Korean peninsula. That's the case despite Japan's close proximity to North Korea, and its geographical risk of being targeted by a North Korean missile strike. In recent weeks, the Yen has risen in value, partly because of hope of a deal between the U.S. and North Korea, and partly because of Japan's strong economic hand on a global basis. Japan is the world's second-largest owner of foreign assets (it owns about $1.04 trillion in Treasuries) and the yen historically performs well amidst bouts of geopolitical strife.

A Tale of Two Outcomes

Sign up with your email to receive
our weekly FX newsletter.

There's no way of knowing what the result will be if and when President Trump and Kim Jong Un meet, but for the foreign currency markets, past really is prologue, no matter transpires.

Historically, foreign currency traders along with cash managing professionals abhor war. FX investors only need to look back in the rear-view mirror to 2014, when a military conflict between Russia and the Ukraine saw both country's currencies cut in half.

Yet if the summit talks bear fruit, and North Korea sees sanctions eased and gives up its nukes, FX and international investors will be more likely to invest in key geographically-linked countries like South Korea, Japan and, yes, even North Korea.

If the summit doesn't occur at all, or doesn't yield positive results, investors will head for the hills. If talks of war escalate, sending foreign currencies down along the Pacific Rim, FX investors will seek to hedge their bets on forward contracts and prepare for the worst.

Either way, the global foreign currency market bears watching, as the U.S. and North Korea head, hopefully, to the bargaining table, yielding positive results.