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Australia goes to the polls about a week after Brexit. This could shape the direction of the Aussie while the world is not looking. Here are the scenarios from Nomura:

Here is their view, courtesy of eFXnews:

With global focus on the UK referendum and outcome,  investors could be forgiven for forgetting that Australia will be holding an election on 2 July,  in which both the lower and upper house seats are up for grabs. We wrote on the elections a couple of weeks ago; since that time local polls have remained quite tight and  markets still appear relatively complacent.

Our base case remains that the Liberal/National Coalition (L-NP) will win the elections, with a significantly reduced majority; this appears to be the consensus market view. However, given how close the polls are, we suspect that many market participants are not sufficiently considering the likelihood of a win by the Labour Party or of a minority government involving post-election discussions and uncertainty.

Market impacts under alternate scenarios

To summarise, here are our views:

L-NP win –  The status quo and the removal of the uncertainty should be  positive for AUD in the short term. Moreover, the market would see a smaller chance of an AAA downgrade, and Australian sovereign CDS would perform well as would Australian banks.

ALP victory  –  The ALP’s platform suggests a bigger deficit in the coming year. The uncertainty associated with the change in government would likely be  negative in the short term, especially since a larger fiscal deficit would increase the perceived risk of a potential credit downgrade. However, there is also a risk that the increased spending or at least the removal of the fiscal drag could allow the RBA to stay on hold, which would be positive for AUD.

Minority government  – The uncertainty generated by this scenario would be negative for AUD,  as there would be several days of confusing protracted negotiations. Because smaller parties are closer ideologically to the ALP, the uncertainty stemming from a minority ALP government may dissipate faster than if the result is a minority L-NP government, as an agreement to support the government would be easier to reach.

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