North Korea Curbs Risk Appetite, Aussie Softens on Safe-Haven Demand
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North Korea Curbs Risk Appetite, Aussie Softens as Safe-Haven Assets in Demand

29 August 2017 by FC Exchange

This week geopolitical tensions between North Korea, South Korea, the US and Japan threaten to curb risk appetite in the currency market, leaving the Aussie exchange rate no choice but to soften, say industry experts FC Exchange.

GBP – Pound hits eight-year lows

Last week

The pound touched fresh eight-year lows against the euro (GBP/EUR), reaching Interbank (IB) levels of 1.0744.

Week ahead

Yesterday saw the third round of Brexit negotiations resume in Brussels and the current pressure on the pound is mainly attributed to the perception that negotiations are not moving forward significantly. The European Union’s chief Brexit negotiator, Michel Barnier, has spoken out and warned the UK to start negotiating ‘seriously,’ in some of the harshest words to have been publicly voiced by the EU thus far. It seems as if investors expect the possibility of a messy exit which will be more damaging to the British economy than to the Eurozone’s, and are selling the British currency accordingly.

Today has seen the release of Nationwide house prices survey which showed another small decline.

EUR – Euro continues to climb

Last week

The euro continued its recent impressive performance gaining further ground against the pound (EUR/GBP) while touching fresh two-and-a-half-year highs against the US dollar (EUR/USD).

Week ahead

European leaders seem committed to maintaining the official stance that post-Brexit trade negotiations will not proceed until the divorce terms have been satisfied. There appears to be a growing concern amongst industry leaders in both France and Germany that failure to agree on a trade accord with the UK, would prove extremely detrimental to both sides which could have long-term implications for the euro.

This morning has seen another jump in German consumer confidence which has added to euro strength, but the focus will quickly turn to Eurozone inflation data due for release tomorrow.

USD – US dollar investors look towards GDP numbers

Last week

The Jackson Hole summit was an anti-climax for many after Federal Reserve Chief Janet Yellen failed to discuss the eagerly anticipated topic of interest rates. Yellen instead discussed financial regulation progress, much to the disappointment of markets. Yellen also stressed the importance of bank regulations, something which President Donald Trump has vowed to ease. With Yellen’s term due to end in February, Trump hasn’t yet announced whether he will reappoint her to continue in the lead role.

Week ahead

Disappointing economic data yesterday showed another decline in wholesale Inventory numbers, but more importantly, a drop in the advanced goods trade balance which came in at -US$65.1billion against a forecast of -US$64.0 billion, further reducing the prospect of another US interest rate hike this year.

Tomorrow’s US gross domestic product (GDP) data will be carefully scrutinised and any reading above 2.6% annualised will likely see the USD gain some support.

AUD – Australian dollar climbs following Jackson Hole Symposium

Last week

The Aussie dollar managed to climb higher against the US dollar following the Jackson Hole Symposium as markets were disappointed with the lack of talk surrounding monetary policy.

Westpac’s Imre Speizer commented: ‘The eagerly awaited Jackson Hole speeches from Yellen and Draghi contained little on monetary policy, disappointing those looking for clues on outlook. The US dollar and bond yields fell.’

Week ahead

However, the week hasn’t begun well for the Australian currency following tensions escalating in North Korea. The Aussie fell as investors headed for safe-haven assets after North Korea launched a missile through Japanese airspace over the mainland.

Meanwhile, Australian building approvals numbers are due out on Wednesday, followed by private capital expenditure on Thursday, and the Australian performance of manufacturing index on Friday. All of these data hold a medium weighting and therefore could create some moderate Aussie dollar movement. However, even if the data prints positively, tensions with North Korea could see the Aussie remain softer.

Safe-haven assets could surge on geopolitical tensions

Overnight, news broke that North Korea fired a missile over Japan in an unprecedented threat. The test is being viewed as a major provocation causing geopolitical tensions to rise to new highs – President Trump already warned earlier this month that Pyongyang would face ‘fire and fury’ if it continued to threaten the US. Developments in this situation could lead to short-term gains for safe-haven currencies as relations with North Korea deteriorate further.

Disclaimer: This economic update is provided by FC Exchange a Global Reach Group Company, industry leaders in foreign exchange. Authorised affiliates are permitted to reuse content.

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