Morgan Stanley: Australian Dollar Post-Elections Gains Could be Fleeting

Aussie Dollar

Image © Greg Brave, Adobe Stock

- AUD bounces after Labour party lose election

- AUD fundamentals could still weigh however

- Housing still weak and labour vulnerable

The Australian Dollar will probably not hold onto its post-election gains as the old problems which shaped the previously bearish outlook remain, says Andrew Watrous, an analyst at Morgan Stanley, who retains a bearish outlook for the currency.

The Aussie rebounded to above 0.69 versus the Dollar after the surprise results of the May general election and the strengthening Australian unit pushed the Pound-to-Australian Dollar exchange rate down from 1.8591 to 1.8360.

But, the recovery is likely to be ephemeral suggests Watrous as the main bugbear of the Australian economy - the housing market - continues to decline and the previously resilient labour market continues to become increasingly vulnerable.

AUD housing market

Add to this high exposure to China via trade, and an increasingly acrimonious U.S.-Sino trade war and you have a recipe for a weaker currency.

AUD china

The Aussie bounced following the Australian general election on the failure of the opposition Labour party to successful dethrone the governing Liberal coalition under Scott Morrison.

Part of the Labour Party's manifesto had been to remove a tax discount for homeowners which would probably have worsened the downtrend in Australian house prices.

House prices have fallen so much it has raised concerns about the wider economy. House values impact on consumption as people tighten their belts when their major asset falls in value. These fears have become so acute they have impacted on the currency.

The labour market had been seen as the main pillar of strength of the Australian economy but there are even signs this former bastion of strength may now be in decline. The unemployment rate surprisingly rose 0.1% in April and lower-than-expected labour costs suggest increased labour market slack.

Without a strong labour market to counteract the exigencies of the housing slowdown the risks to the economy increase significantly. Not long ago a leading Australian central banker said he did not fear for the housing sector yet as most households had at least one working adult in them who could pay the mortgage - if this changes, however, the economy could enter a death spin of repossession, falling house prices and negative equity.

In such a situation the Aussie would get hammered as foreign capital inflows dried up and the Reserve Bank of Australia (RBA) furiously cut interest rates to try to offset the pain.

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