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According to Robert Rennie, head of financial market strategy at Westpac, last week was a game changer for Australian financial markets with the shock re-election of the Coalition government.

Key Quotes

“Westpac now expects that with “the June cut now almost certain; a second in August; … a November cut should also proceed”. This third cut clearly has implications for our A$ forecasts and expectations. Back in February, when we forecast two rate cuts, we lowered our year-end forecast to 0.68; we have now cut that forecast further to 0.66.”

“But behind this forecast sits a number of divergent factors. Yield differentials are clearly headed in one direction – lower – thus further removing interest rate support for the traditional carry driven Australian dollar.”

“However, a number of idiosyncratic factors are clearly at work in steel-related bulk commodity markets driving prices sharply higher making Australian assets more attractive to global investors and supporting the externally facing sectors of the Australian economy.”

“On top of this, risk aversion is rising as the US and China challenge each other on trade, and the Chinese authorities appear to be increasing liquidity to support growth. These factors would also tend to have divergent implications for the A$.”

“Getting the balance right between these various drivers is fraught with difficulty, potentially adding both upside and downside risks over time.”