Updated
After days of resistance, the Australian dollar has finally capitulated to the growing leadership uncertainty clouding the Federal Government.
The currency had bounced from recent lows, and was trading as high as 73.8 US cents two days ago, even as the Liberal leadership crisis deepened.
The peak in the currency came in overseas trade, early Wednesday morning Australian eastern time, which followed Prime Minister Malcolm Turnbull’s surprise spill motion on Tuesday, which he won 48 to 35.
Perhaps naive overseas traders, unfamiliar with the Australian political environment, did not realise that this narrow win all but ensured further leadership instability?
However, the Thursday morning resignation of key ministers Mathias Cormann, Michaelia Cash and Mitch Fifield was a clear indication that Mr Turnbull’s status as Liberal leader was all but terminally doomed.
That was when the Australian dollar started its dive — from 73.5 US cents to 72.8 in a matter of hours.
Since then it has fallen further in overseas overnight trade, touching a low of 72.4 US cents this morning.
Greg McKenna, the chief market strategist at AxiTrader, said traders are not usually concerned with Australian political ructions, due to the nation’s stable public institutions, but this leadership contest has been unusual and comes amid a global context of political instability.
“In a world of Trump, Brexit, Putin, Erdogan, Duterte and many other populist leaders, the type of instability and lurch in policy Dutton has already articulated, combined with the reality that the whole world knows this will be Rudd-Gillard-Rudd-Abbott-Turnbull-Dutton/Morrison/Bishop has simply given the bears the whip hand on a day the US dollar was doing better anyway,” he wrote in a note.
“So, the path of least resistance for the Aussie [dollar] was lower.”
Chris Weston, the head of research at Pepperstone, noted traders are very hesitant to buy the Australian dollar until the political uncertainty is resolved.
“The news flow coming from Canberra is keeping traders away from the Australian dollar, and when the bid dries up, and sellers are prevalent, we can often see punchy and exaggerated moves,” he wrote.
Mr McKenna said the next moves in the currency will be highly dependent on the outcome of the Liberal leadership ballot.
“A clear win for Morrison or Bishop is good for the Australian dollar because we get back to where we were and either of those can probably acquit themselves well in the next general election,” he argued.
“A clear victory for Dutton is probably also positive, but less so than the other two because some folks worry he’ll get trounced in the next election anyway and there are the concerns some have from a Labor government.
“A tight win for any of the candidates is probably a little bit of poison and any bounce is likely to prove short-lived.”
Topics: currency, markets, australia
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