The Australian dollar has lost around half a cent in early Monday trade after the result of the federal election on Saturday appears to have delivered the potential for minority government and political chaos for the next term of parliament.
That outcome, and the chance that it means deficit repair and structural economic reform is put off again could threaten Australia’s AAA rating and undermine confidence in the economy.
AMP chief economist Shane Oliver summed it up nicely over the weekend. Oliver said:
The prospect of another three years of de facto minority government coming on the back of the minority Gillard/Rudd government over 2010-13 and the 2013-16 Coalition governmentâ€™s inability to pass much of its economic and budget reform agenda through the Senate is not a good outcome for the Australian economy. Whoever wins it means that the risk of a sovereign credit rating downgrade has increased further.
As a natural current account deficit nation a sovereign credit downgrade will raise the costs of borrowing in the economy marginally and impede the banks ability to fund that deficit on behalf of the economy.
But the key reason for the initial selling this morning is uncertainty. The election leaves traders, investors, consumers and business in limbo as we wait for the votes to be counted and a government to be formed.
Uncertainty in Australia just adds to the uncertainty globally that has risen in 2016. So traders are selling some Aussie dollars early.
While traders will be watching support at 0.7400 and 0.7343, there is no reason to believe the Aussie dollar will collapse. That’s a point Kymberly MArtin, BNZ’s strategist in Wellington, made in her morning note today.
“History suggests that impact will likely be temporary. Medium-term AUD trends are driven more by global and commodity trends than domestic politics” she wrote.
A short time ago (6.04am) the Aussie was trading at 0.7445 down 0.69%.