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Australian Dollar, ASX 200 Add Politics to Their Long Problem List

Australian Dollar, ASX 200 Add Politics to Their Long Problem List

2018-10-23 02:00:00
David Cottle, Analyst
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Talking Points:

  • Australian assets had worries enough
  • Lack of interest rate support and rising global risk aversion have kept AUD/USD pressured all year
  • Now Aussie politics are buckling too. Again.

Fourth-quarter technical and fundamental forecasts from the DailyFX analysts are out now.

It is fair to say that Australian local elections do not often capture the imagination of global markets. Let’s be honest here. They rarely even capture their attention.

Last weekend, one did though.

The affluent Sydney suburb of Wentworth held a by-election to replace its Member of Parliament. He was the former Prime Minister and Liberal Party leader Malcom Turnbull who left office in August. The result was a massive swing against the Liberals, a victory for independent candidate Kerryn Phelps and, most significantly, the end of the Liberal government’s wafer-thin, single-seat Parliamentary majority.

Now the government of Scott Morrison must cobble together a coalition in order to limp on in power until the next general election. That must come before May 2019.

The Australian Dollar duly took a knock on the Wentworth news. AUD/USD headed back down to within a whisker of its early-October lows, which stand as the nadir for this year so far. The key Australian stock benchmark also slipped. The ASX 200 had already surrendered the psychologically crucial 6000 level. Wentworth’s political bombshell made recapturing it an even harder task for the bulls.

POLITICS COMPOUND TRADE WAR, INTEREST RATE HEADWINDS

Australian assets already had problems enough, you might think, particularly the Aussie Dollar. The currency already lacked interest rate support. Stubbornly weak Australian inflation has markets predicting that the Official Cash Rate will be staying put at its record, 1.50% low for all of this year and next. The contrast with a US Federal Reserve now well embarked on monetary tightening and set to continue on that path could hardly be more stark.

Then there’s the general risk aversion engendered by seemingly intractable trade war fears. Of course these primarily involve China and the US. But there will be crossfire and Australia is caught in it perhaps like no other nation.

On the one hand, both its currency and stocks tend to feature as ‘risk assets.’ What that means is that investors head for them when they are happy about global growth prospects. And now they’re not. On the other hand, and more specifically, Australia relies on China for much of its vast raw material export trade and on the US for security. Oh yes, tension between the two global titans feeds back to Australia in myriad ways.

So with all of the above weighing on Australian assets, the last thing the routed bulls needed was intensifying political risk.

AUD/USD, ASX 200 VULNERABLE DESPITE DECENT ECONOMY

Need or not, now they have it. Australia has had five Prime Ministers since 2007. Wentworth has dramatically increased the chances that 2019 will bring it a sixth.

That would be a lot in a short time by mature democratic standards. For the markets, high churn rates at the political top bring constant new political priorities, to which investors have to adjust. They also raise worries that plans instigated today will sink tomorrow if the government is out before it can deliver. They make the currency less attractive to hold and the stock market more of a risk.

Now it is possible that Wentworth was a protest vote and that Liberal heart-landers will come back home at general election time. However, it is far from certain.

So we can add political risk to Australian assets’ broad range of woes, probably until after that election has been fought and maybe beyond if the result is once again narrow.

There’s cruel irony here too. Australia’s economy is not doing that badly, with growth firm and employment revving. Sadly for bulls of both the Australian Dollar and the ASX, market attention is elsewhere.

Australian Dollar, ASX 200 Add Politics to Their Long Problem List

AUD/USD may be close to its 2018 lows, but it seems very likely to make some new ones before we get to December 31.

AUD/USD & ASX 200 TRADING RESOURCES

Whether you’re new to trading or an old hand DailyFX has plenty of resources to help you. There’s our trading sentiment indicator which shows you live how IG clients are positioned right now. We also hold educational and analytical webinars and offer trading guides, with one specifically aimed at those new to foreign exchange markets. Be sure to make the most of them all. They were written by our seasoned trading experts and they’re all free.

--- Written by David Cottle, DailyFX Research

Follow David on Twitter @DavidCottleFX or use the Comments section below to get in touch!

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