Australian dollar survives political instability
Published on 27.08.2018 19:16

The Australian dollar has continued to climb today, following on from last Friday’s rally after the election of a new Prime Minister to Australia brought a sense of calm over the markets.

There were 3 candidates who put there hat in the ring to become Prime minister and in the end, it was Scott Morrison who unseated the former PM Malcolm Turnbull which caused a rally in the Aussie dollar as he as seen as the most business and market friendly candidate.

"PM Morrison is the most market-friendly option, having successfully negotiated through multiple portfolios such as social security, border security, and more recently presiding over a substantial improvement in the budget balance as Treasurer," said Annette Beacher, Singapore-based chief strategist at TD Securities.

Time will only tell whether Australia will once again regain some political stability and this may be a worry for some investors but some say the big picture for the Australian economy and indeed the Australian dollar is commodity prices and interest rates.

Interest rates in the US have now overtaken the rate in Australia for the first time in many years which has seen the appeal of the carry trade erode and with the reserve Bank of Australia predicted to leave interest rates on hold for up to 2 more years, the situation will probably only get worse.

A recent slowdown in China has raise concerns that they will reduce their demand for commodities such as Iron ore which is Australia’s biggest export and that will be another minus for the Australian dollar

“It is hard to avoid the conclusion that we have seen a rare instance of the Aussie carrying a small political risk premium,” said Sean Callow, a senior currency strategist from Westpac.

“But history argues for this effect to be short-lived. Investors seem to follow the reasonable assumption that commodity prices and yield differentials are the key drivers of the Aussie, regardless of which party or which prime minister is in power in Canberra.” He added.

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Andrew Masters

Analyst

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