How Australia’s Elections Might Affect Currencies

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Tomorrow, Australians are heading to the polls for the federal elections. The elections will determine their legislature and new Prime Minister.

Elections usually generate some market volatility as investors digest the change in government, and what it means for the future prospects of the economy.

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The latest polling shows that the current Prime Minister Scott Morrison’s Liberal/National Coalition is just a percentage point behind opposition leader Bill Shorten’s Labor. This is well within the margin of error.

Anything could happen! And that uncertainty isn’t something that the markets like. In fact, one could argue that not wanting to affect change in the middle of an electoral period was one of the reasons for the RBA’s hold.

The Sides

Should Scott Morrison prevail, it would be a continuation of the status quo. And the market would likely positively interpret this.

Currently, the government has a majority of just one. And the lack of support in the Senate has stymied the administration’s ability to push policy. This has frustrated the electorate, and by a small margin, they are turning to Labor.

Labor has promised a series of reforms. However, these would largely be seen as negative for the business climate. This is especially true regarding cutting GHG emissions. Shorten has also proposed expanding social spending, raise the minimum wage and eliminate tax breaks.

The Results

The markets would most likely want a solid victory. The ideal scenario to restore stability in policy would be for the party in power to attain a clear cut majority in the Senate. Over the last 12 years, Australia has had half a dozen leaders, which has led to policy stagnation.

What would concern the markets the most would be a hung parliament. Without a clear winner, one of the major parties would have to cobble together an uneasy coalition with smaller parties and crossbenchers.

This would undoubtedly cause uncertainty. There would need to be extended coalition negotiations and policy concessions to get support. This could prompt businesses and consumers to hold off on buying until they get some clarity on what things will look like in Canberra.

Adding extra uncertainty to the current election is the change in the voter rules. This is upsetting the electoral math.

Considerations for the Markets

Generally, the stock market trades sideways ahead of the elections. There is then somewhat of a “relief” bump once the results come out. This risk-off sentiment generally translates into more investments in bonds, pushing up yields and strengthening the currency.

If a clear victory is attained, there could be a shift away from bonds back to the stock market. This implies that there will be more pressure on the currency.

Labor-proposed policies such as increased spending and raising the minimum wage are likely to support inflation. This would provide further downward pressure on the currency.

On the other hand, Liberal policies are likely to be interpreted as business-friendly. These would attract foreign investment, easing some of the downward pressure on the currency.

An unclear result would probably prolong the sideways trading. In turn, this would keep the currency from weakening. The other factor is the tone that comes out of the leaders following the election, and the likelihood they will form a coalition in the near term. This could cause the currency to weaken quite quickly after the announcement of the results.

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