Australian Dollar Softer as Election Uncertainty Bites

The Aus dollar will likely remain under pressure against the US dollar owing to the electoral stalemate following Australia's election. However, it will take more than a tight election to halt the currency's advance against the limping British pound.

• At the time of writing 133 of 150 seats are confirmed, both Labor and the Coalition are on 64 seats. 76 seats are needed to win
• Reserve Bank of Australia keeps interest rates unchanged

The Aussie dollar continues to trade a soft tone against the US dollar owing to the electorate failing to pick an outright winner in the country's general election.

Neither of the two largest parties, Labor or ruling Liberal, won enough seats to form a government. 

Analysts believe clear result may not emerge until the end of this week and it could take significantly longer for a government to be formed.

The last time Australia had a hung parliament in 2010, it took 17 days for the Government to be formed.

If no party emerges with a clear majority, Prime Minister Turnbull would seek to remain in office with the support of the minor parties/independents.

This would involve agreement to pass the budget supply bills and to support the minority government in the event of a no-confidence motion.

Opposition leader Bill Shorten has meanwhile urged Prime Minister Malcolm Turnbull to resign after the elections failed to deliver a clear winner.

"I think he should quit, he's delivered instability," says Shorten.

The Australian Dollar Hates Uncertainty

"In the near term, we think that increased uncertainty around the political outlook is likely to weigh on both household and business confidence, adding to existing concern over global growth following the Brexit vote," says Felicity Emmett, Head of Australia Economics at ANZ Research.

The AUD/USD exchange rate is trading 0.37% lower on day-to-day comparison at 0.7511 at the time of writing.

The pound to Australian dollar exchange rate meanwhile maintains its decline and is seen at 1.7562.

Bank of America Merrill Lynch analyst Tony Morriss and his team, argued that the Aussie was likely to remain resilient despite the uncertain election result, because although it would increase the probability of the Reserve Bank of Australia cutting interest rates, rates were still comparatively high for the G10 at 1.75% and this made the country’s yields more attractive to outside investors:

“Australia is facing another episode of political uncertainty following the weekend election. This is negative for sentiment. This adds to the case for easier RBA policy over time and increases the risk of an adverse action on the rating at some stage AUD has proved resilient to these events helped by demand for positive yield, which is unlikely to subside in the near term.”

Latest Pound / Australian Dollar Exchange Rates

	Live: 2.0095▼ -0.33% 12 Month Best: 2.1645
*Your Bank's Retail Rate	1.9412 - 1.9492
**Independent Specialist	1.9814 - 1.9894 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

However, the team at ANZ are little more concerned, particularly should a minority government and/or an unmanageable Senate will make it difficult to pass legislation, which could delay the return to budget surplus and increase market speculation about the Commonwealth’s AAA credit rating.

In terms of the rating agencies, Standard and Poor’s has said that “irrespective of the political composition of any new government, we could lower the rating if parliamentary gridlock on the budget continues and Australia’s budgetary performance does not improve broadly as we expected a year ago.”

Moody’s has said that “short-lived political uncertainty would have limited credit implications for Australia” and that the election would affect the rating “only if it changed broad policy priorities and the effectiveness of their implementation”.

Fitch has noted that “political gridlock that leads to a sustained widening of the deficit would put downward pressure on the [AAA] rating, particularly if the economic environment deteriorates”.

Next Target for GBP/AUD

From a technical point of view, the GBP/AUD conversion has extended lower, currently trading in the 1.7620s, the exchange rate has now broken decisively below the key 1.7700 post-Brexit trough, providing confirmation of a continuation lower to the next target at 1.7500.

A further break below 1.75 – confirmed perhaps by a break below 1.7450, would probably then also see an extension down to the next set of support lines starting with a historic level which could act as a break on further weakness 1.7207 and then the S1 monthly pivot at 1.7079.