Does Action Against North Korea Hurt the South Korean Won?

United States presidents have tried for decades to rein in North Korea’s nuclear ambitions and guided missile development. These attempts have not been successful. However, it is extremely unlikely that the USA will allow the unstable ruler of North Korea to possess bombs and a delivery system capable of striking the USA. While South Korea would just as soon have their North Korean neighbor act in a more civilized manner they are reluctant to antagonize a country with a million man army on the DMZ just 35 miles from Seoul, their capital city. The South Korean stock market moved down a notch when the US bombed a Syrian air force base thinking that the USA could just as easily start bombing North Korean missile sites. From the Forex point of view does action against North Korea hurt the South Korean won?

The Yen versus the Won

Bloomberg writes that watching the Yen versus the Won is a useful way to see how traders view geopolitical risk on the Korean Peninsula.

Perhaps the best barometer of rising geopolitical risk in East Asia is the outperformance of the yen against the won. And despite some technical resistance ahead, the yen’s strength can continue, according to Daiwa Securities Co.

Japan’s currency has gained about 3 percent against its South Korean counterpart since April 3, when President Donald Trump said the U.S. could act alone to solve the North Korean problem. The currency pair rebounded to 9.65 yen per 100 won Thursday after approaching its 200-day moving average of 9.51 Wednesday.

The yen may breach this resistance level and rise beyond 9.00 per 100 won by the end of June, said Yuji Kameoka, chief FX analyst in Tokyo at Daiwa Securities Co.

In the near future North Korea might be testing a nuclear weapon to celebrate the birthday of the country’s founder. When this sort of thing happens South Koreans wonder about the US response and if they will end up back in a war with the North like in 1950. Although the Japanese would also not like a war in their neighborhood they are separated from North Korea by the Sea of Japan. The risk to Japan of hostilities in Korea in less than for South Korea and thus the Yen is less affected by the risk of action against North Korea.

Miscalculation and Fatal Consequences

The Korean War has been on pause with a truce since the 1950’s. Armies line both sides of the Demilitarized Zone and this includes 28,500 US soldiers in South Korea. An ongoing concern for more than half a century is that miscalculation by one side or the other will lead to renewed armed conflict. CNBC writes about the fatal consequences of miscalculation on the Korean Peninsula.

The U.S. military announced on Sunday it had dispatched a carrier strike force group led by the USS Carl Vinson to the waters off the Korean Peninsula. In response, Pyongyang vowed it was ready for war.

Tensions continued to heighten as satellite images from the U.S.-based analysis firm 38 North revealed the secretive regime led by Kim Jong Un could be making preparations for a sixth nuclear test as soon as Saturday.

And on Tuesday, President Donald Trump tweeted, “North Korea is looking for trouble. If China decides to help, that would be great. If not we will solve the problem, without them!”

The new wild card in the deck is the new US president and his statement that the US is going to solve the problem with or without help from China. Thus the threat of action against North Korea has hurt the South Korean Won and will continue to do so until  a solution is reached.