Australia: Political risk weighs only temporarily on the Aussie - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the Australian dollar has been the most volatile currency in the Asian trading session.

Key Quotes

“The Aussie weakened initially following the release of the Australian election results overnight although weakness proved short-lived. The election results were inconclusive with results showing so far that neither the Liberal-National coalition nor the opposition Labour Party can form a majority government. The Liberal-National coalition leads in 66 seats compared to 72 seats for the Labour Party with both falling short of the 76  seats required to hold  a majority in the lower house. According to Bloomberg, postal votes may decide as many as 12 unclear seats.

The final results are expected tomorrow. Political instability is not really new for Australia which has had three different Prime Ministers since 2013. The last time Australia had a hung parliament was in 2010 and on that occasion weakness in the Australian dollar proved similarly fleeting.

We do not expect the performance of Australian dollar beyond the very near-term to be driven by domestic political developments. The Australian dollar is benefitting from the relief rally in risk assets following the Brexit vote as fears that it would trigger a sharper slowdown in global growth have not materialized. The FT has reported as well that the global economy was in reasonably good shape just before the Brexit vote.

According to Fulcrum’s nowcast models global growth was running at 3.5% in June which was significantly above growth rates recorded for the majority of 2015 and early in 2016. It should help the global economy to better absorb the negative Brexit vote shock which is expected to be only modest. It appears with consistent with the price of copper rising to its highest level since early in May which is offering support for the Aussie. In these circumstances, we do not expect the RBA to strongly signal after their policy meeting tomorrow that it considering further easing.”