The Australian electorate pushed out the Labor government of Kevin Rudd and brought in the Liberal conservative coalition under Tony Abbott. The new Prime Minister began immediately on Sunday in drafting a law to repeal the nation's carbon tax and future emissions trading scheme, one of the cornerstone election pledges he made. The Australian dollar had a post election bounce, mostly on China data, but there are a few things to consider.
Abbott's Liberal-National Coalition so far has just 32 or 33 of the 76 seats of the Senate or upper house in Australia which must also approve of any legislation passed in the lower house so it’s not all smooth sailing for Tony. Abbott also has to face the fact that the next national general election must be held within three years of the first meeting of the new federal parliament. Historically, the average life of Australian parliaments is about two-and-a-half years. Australia governs itself well enough along these lines but his majority in the lower house is because the electorate tired of the bitter infighting in the Labor Government. Many voters made the comments exiting the polls that it was more a vote against Labor rather than a vote for the Liberals.
So what does that mean for the economy and the dollar? Maybe not much at all. Abbott may win a second term and effectively put his own stamp on the country and the economy in three years, more so if the Liberals can gain control of the upper house. But equally, the Australian public could decide three years from now that the Labor Party was not so bad after all and blame the Liberals for coming problems. In the interim, the government budget should return to surplus as predicted under Labor because of Labor policies currently in place. That will tied the Liberals over for the next three years even as the economy continues to slow and be buffeted by the headwinds from elsewhere like China and the Fed tapering.
The aussie will continue to face problems and decline to 85 U.S cents in the mid-term because the Australian economy is so small and all the factors that pushed the aussie dollar higher, like higher rates and Chinese demand for raw materials are falling away. Nearer term, the aussie is almost overbought with a relative strength index print, 14-day exponential, of 68.55. FX speculators are net short by 71,506 contracts, not extreme for the aussie but not small either. Expect trading volatility in either direction until perhaps the FOMC meeting and any announcement from the Fed, a bigger factor than the Australian election.