Iran, China, and Korea

Iran weekend tension, again

Despite some conciliatory headlines between the U.S. and Iran, the behind-the-scenes action continues to look concerning as half the U.S. military is parked in the Middle East. The U.S. Embassy in Israel is moving non-essential employees out, and China is recommending citizens evacuate Iran and avoid traveling there.

Similar to the situation going into last weekend, there is a range of military outcomes from one-off strike to full attack that would yield a wide variety of market outcomes. Presumably any attempt at regime change is a different scenario than the one and done attacks on facilities in June 2025.

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USDCNH

China is now officially pushing back on yuan strength as the market has become too one-sided and they don’t like giving free money to speculators. With most banks now advocating a long CNH trade and the slope of the move getting zippy, they have enacted the first pushback strategy: Tweak a rule and cut the required reserves on forward transactions from 20% to zero. These sorts of tweaks and rule changes are the standard approach of the PBoC when they want to signal dissatisfaction with either the pace of the move in the yuan, or the one-sided nature of sentiment.

These moves do not always mean that USDCNH will rip higher, but they make it much less fun to be short. You can see that in 2026, they have been allowing the slope of appreciation to increase significantly. This change of preference does not mean the slope has to turn positive; it just means it should flatten out.

Looking at past instances of these forward FX reserve requirement changes (thanks Simon Flint for the dates)… I have marked USDCNH with an arrow showing the PBOC’s intent for USDCNH.

You can see that these were not game changing adjustments. The issue, though, if you are speculating against the PBoC, is that they have a bottomless bag of other tools they can reach into. There are probably better trades out there at this point. I would also argue that this move by the PBoC makes gold and AUDUSD longs a tad less attractive at the margin. My gold idea is getting a tiny bit stale. It has worked, but the China isn’t really buying gold these days, and plenty of U.S. tax refunds would have been issued by now and yet retail doesn’t seem to be deploying a ton of cash into stocks or gold. So I will take profit on the long gold here.

Looking at the month of February, you can see the first day China came back from holiday (23FEB on this chart which is Asia morning 24FEB) China sold gold. Since then, U.S. and Asia have been small buyers but the interest has not been particularly persistent. My theory was that tax refund money drops would drive retail into GLD but that hasn’t really been the case.

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Korea

Korean equities are in the sweetest of sweet spots right now as the DRAM shortage and chip making are the epicenter of global equity buying. Retail participation there is high, and the price action reminds me of 1999. In fact, the NASDAQ was trading around 2,500 in April 1999 before it ripped higher and peaked just above 5100 in March 2000. This time, we have the KOSPI starting around 2,500 in April 2025 and it has now ripped above 6,000 in a similar time. I will not embarrass myself by overlaying what happened after, but here is the chart of that NASDAQ rally and the KOSPI rally. Note that they are the same y-axis because they both started at 2,500. No y-axis shenanigans here.

This is an accident waiting to happen, but timing is always tough on these things. There is a 3X Korea ETF called KORU, if you would like to make your life even more difficult. Note in the chart that the KOSPI also broke to a new all-time high last night and then dropped back below. A false breakout of sorts.

Fading bubbles like this is double black diamond level stuff, and I do not recommend it for new traders. If you are into it, here are four different approaches that can work.

1. Take a tiny position with super wide stop loss. I don’t like this. It’s often undisciplined and low leverage. If you catch the turn, you don’t make much money.
2. Short EWY or KORU here with a stop at new highs. This is usually my preferred way. Take a shot and stop out if wrong. The issue with these ETFs is that they are not super liquid outside NY time, when the KOSPI is moving. So there are risk management issues and you need to be careful with sizing. But I am doing it this way and will keep the sizing under control so I don’t blow myself up.
3. Buy puts. Way too expensive. IV on KORU puts is above 150%.
4. Short EWY or KORU and sell puts. March 500 KORU puts trade 186% IV with a $50 premium. If you are short KORU and short the puts, you get a huge head start. That said, this is really hard to risk manage if you’re wrong. I had success doing this strategy in AGQ (leveraged silver ETF) but the liquidity in the KORU puts is horrendous so I am not doing it here.

Again, this is a high risk trade. I am trying to catch the tippy top in a bubble. But to me, #2 is the best and logical strategy. If KORU breaks 700 or EWY breaks 156, my idea is wrong. Watch SNDK for direction in NY time because it’s a similar play to Korean equities as it’s a pure play on rising memory prices. I very much like the timing on the Korea fade, but I will leave it out of the sidebar because it’s only for those who are adept risk managers. Now I pray for fortuitous timing. If I do catch the turn, I would expect a rapid, eye-watering 3-day move lower.

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Calendar

Next week’s calendar is fairly ZZZ with the weekend yes/no on Iran attacks being the first key moment and Friday’s NFP as the bookend.

I hope you have a not-too-frustrating weekend.

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good luck ⇅ be nimble