Australian Dollar Gives Ground to Sterling on Geopolitics, Housing Stats

The Australian Dollar was a casualty of the market's desire for safe-haven assets in the wake of renewed tensions on the Korean peninsula.

The Pound to Australian dollar exchange rate (GBP/AUD) was boosted Tuesday after the latest provocation from North Korea and a disappointing set of housing market numbers from both sides.

Unease rippled across markets in the early hours London time after the Japanese government announced that North Korea had fired a number of missiles through Japanese airspace and across part of the mainland.

“The missile launch undermines hopes for dialogue with North Korea following a period where tensions appeared to have cooled,” says Andreas Johnson, a strategist at SEB Bank.

The Aussie was one of the main losers of the news as it is typically a casuality of heightened risk aversion which tends to prompt investors to invest in lower yielding but sturdier assets.

The GBP/AUD exchange rate rose 0.55% to 1.6310 during early trading in London. In addtion, losses have come against the Euro and US Dollar with AUD/USD seen 0.22% lower at 0.7945 and EUR/AUD up 0.88% at 1.5170.

Pyongyang's latest move threatens to escalate an earlier war of words between the United States, Japan’s closest ally, and North Korea, which saw President Donald Trump direct multiple threats at the Asian Pacific country.

Kim Jong Un of North Korea made a very wise and well reasoned decision. The alternative would have been both catastrophic and unacceptable!

— Donald J. Trump (@realDonaldTrump) August 16, 2017

“This will likely continue to run as an issue for the markets in the background but certainly is one further reason for caution in being exposed to the US Dollar versus the core G10 currencies like the Yen, Euro and Swiss Franc,” says Derek Halpenny, head of global markets research at MUFG, in his morning note to clients.

Tuesday’s missile launch and subsequent price action was the headline item for GBP/AUD in early trading but it also came sandwiched in between housing market data for both the UK and Australia.

In Australia, new home sales continued their nascent decline, according to a report from the Housing Industry Association, falling by 3.7% during July.

“A drop in new apartment sales have contributed to the continuing decline in new home sales nationally since they peaked in mid 2015,” says HIA’s principal economist, Tim Reardon.

Cooling new home sales in Australia come after several years of strong growth which had fuelled runaway price growth. However, it’s possible that July’s fall was aided by the Western Australian government having ended its First Home Buyers grant scheme on June 31.

“This trend is consistent with HIA’s expectation that activity will decline modestly from these record high levels over a number of years,” Reardon added.

There are concerns that the data might confirm observations that the Aussie consumer is starting to withdraw which might lead to a period of economic underperformance.

However, Australia’s housing market was not alone in experiencing a deceleration in during recent months as figures released Tuesday by building society, Nationwide, showed the UK housing market cooling during both July and August.

August’s Nationwide House Price index showed prices sliding by 0.1% during the period, reducing their annual gain to 2.1%, and taking the value of the average home in the UK down to £210,495.

“The slowdown in house price growth to the 2-3% range in recent months from the 4-5% prevailing in 2016 is consistent with signs of cooling in the housing market and the wider economy,” says Robert Gardner, chief economist at Nationwide.

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