North Korea escalates geopolitical risk - BBH

After a brief period of quiet that some may have confused with a change in posture, North Korea followed up the weekend's test of three ballistic missiles with what appears to have been an intermediate missile that flew over Japan, notes the analysis team at BBH.  

Key Quotes

“South Korea responded with its own symbolic display of force by dropping bombs near the DMZ.”  

“In recent notes, we have explained that the US-South Korea annual military exercises antagonize North Korea.  Last year during these exercises, Pyongyang launched a missile from a submarine, which in military signaling shows second strike capability.  That means that the first strike on North Korea risks a retaliatory strike.  If a military option is not practical, it does not appear that pressure or sanctions work either.  Japan condemned the North Korean action and called for an emergency UN Security Council meeting.  The US response is awaited.”  

“The US dollar's sell-off that began before the weekend continued yesterday and is accelerating today.  North Korea's provocations have added to fuel to the fire that was already burning.  Coming out of Jackson Hole, the consensus scenario saw ECB tapering and Fed allowing its balance sheet to begin shrinking.  Given fading prospects of tax reform and an infrastructure initiative in the US, the greenback was vulnerable.  In our assessment, both fundamental and technical conditions had aligned that warned that the dollar's recent consolidation was over and a new leg lower had begun.”  

“Interest rates remain at the center of our focus.  The US 10- year yields are off more than six basis points to new lows for the year below 2.10%.  Our concern has been that if the so-called Trump trade is being unwound, and the underlying trend growth of the US economy is not about to materially improve, the US 10-year yield may return to status quo ante, to where it was before the Trump trade, which we see as closer to 1.85%.”