Sean Callow, analysts at Westpac Banking Corporation explained that the Australian dollar typically ignores local politics but over the past week, the turmoil in Canberra has been too great to ignore, leaving the Aussie lower despite resolution of the leadership battle.
Key Quotes:
“However, a broad pullback in the US dollar has helped AUD/USD and might have some further to run this week.”
“Over at least the past 25 years, the Australian dollar has been resilient in the face of instability in Australian politics. Investors seem to follow the reasonable assumption that commodity prices and yield differentials are the key drivers of the Aussie, regardless of which party or which prime minister is in power in Canberra. Moreover, an independent RBA has been a source of stability since the early 1990s, with unqualified support from both Coalition and Labor governments.”
“But last week’s drama in Canberra does seem to have hurt the Aussie. From the time of the surprise Liberal leadership spill on Tuesday morning to Friday morning ahead of the second spill, AUD was easily the weakest G10 currency. Of course, other factors could have an impact. For instance, on Wednesday we saw Australian Q2 construction data. But this was actually a positive report, which suggested that GDP data due on 5 September could be stronger than previously expected.”
“The resolution of the leadership contest in favour of Scott Morrison rather than Peter Dutton produced a small (30 pip) rise in AUD/USD. But trading today around 0.7330, the Aussie is still second-weakest in the G10 over the past week. Only the Japanese yen has been softer, as it lost safe-haven demand as the US stock market hit a record high on Friday.”
“So it is hard to avoid the conclusion that we have seen a rare instance of the Aussie carrying a small political risk premium. But history argues for this effect on AUD to be short-lived. Instead, the US should dominate market attention in the coming week, with the legal troubles of former associates of President Trump generating headlines and notable data including the Fed’s preferred inflation measure.
Fed chairman Powell’s speech at the annual Fed conference at Jackson Hole, Wyoming on Friday produced a fall in the US dollar, helping extend AUD/USD’s recovery.
The status of US-China trade negotiations will also remain in focus near term, with lingering optimism that discussions will bear some fruit in time for the November APEC and G20 leaders meetings. Along with steps by China’s central bank to support the yuan, this optimism should limit the downside on the Aussie dollar.
This week’s Australian data focus is the private capital expenditure survey, reporting actual business investment in Q2 and an update on investment plans for 2018/19. This will further shape GDP forecasts but won’t change the monetary policy outlook, with the RBA cash rate firmly on hold at 1.5%.”
Share
