The Australian dollar is set to strengthen against the greenback after the nation’s center-right government clung to power in a surprise election victory at the weekend.
Despite trailing in most opinion polls, Prime Minister Scott Morrison waged a relentless attack on the Labor Party’s progressive agenda to take action on climate change and strip tax perks from wealthy Australians. At the same time, the government ran on its record of economic management, across-the-board tax cuts and a return to a budget surplus.
As Labor’s tax proposals are off the table, giving some relief to the housing market, and with the incumbent government being viewed as stronger economic managers, business sentiment is expected to improve, Andrew Ticehurst, Sydney-based rate strategist at Nomura Holdings Inc. said. It’s a net positive for the equity market and the Australian dollar will likely bounce, he wrote in note to clients dated May 19.
“With a surprise election result over the weekend, we immediately square up our tactical short in the Australian dollar and expect short-end rates to rise,” Ticehurst said. The short position was opened at 69.55 cents on May 14, he said.
Option traders are more bearish on the Aussie than any other G-10 currency as the risk-sensitive asset suffers from the sudden escalation in U.S.-China trade tensions and a slowing economy. Investors are pricing around a 70% chance the Reserve Bank of Australia will cut interest rates in June, overnight index swaps show.
The Aussie sank to 68.68 cents last week amid a rise in the unemployment rate in April and China dashing hopes the trade spat would be ended soon. It’s the lowest level since January.
A speech by Reserve Bank Governor Philip Lowe on Tuesday will be critical for the near-term direction of the Australian dollar and rates, Ticehurst said. Lowe has previously used speeches to provide monetary policy guidance, he said.
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