AUSSIE RALLY CHALLENGES FX WISDOM

DIRECTOR OF CURRENCY RESEARCH, GFT

ONE of the ironclad rules of FX trading is that political turmoil triggers instant selloffs in the country’s currency as speculators run first and ask questions later. Last weekend Australia held an election that resulted in a hung parliament for the first time in 70 years. With 76 seats needed to win a ruling majority, Labour won only 72 while the Liberals collected 71 effectively creating a stalemate that some political observers believe may not be resolved for at least ten more days.

Typically such political uncertainty would have pushed the Aussie lower, and indeed the first reaction by the market on Sunday was to send the currency tumbling nearly 100 points during the Asian open. However, as the night progressed, something unusual occurred. The Aussie rallied and by mid-morning Monday, the pair had recovered all of its losses and was trading at fresh highs for the day as North America opened for business.

So why is the Aussie rallying when the country’s politics is in a state of chaos? In Australia’s case, the impasse may actually be beneficial to investors. Both parties will have to negotiate with independents to secure a majority but with many independent politicians opposing the mining tax, the prospects for its passage and enactment in its current form have diminished greatly. That is viewed positively by global investors who have been troubled by the tax’s negative impact on Australian economic growth ever since the idea was proposed by Labour.

If the fight for control of the Australian parliament proves to be a protracted battle, the Aussie could come under fresh selling pressure as concerns resurface. But irrespective of who forms the next government, the results of the election have clearly derailed the case for the mining tax and that fact alone should prove to be a net positive for the currency in the near term. With little meaningful economic data out this week, the drama down under will continue to attract the market’s attention as trading in the Aussie eludes conventional wisdom.

Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read commentary at www.GFTUK.com/commentary or e-mail borisandkathy@gftuk.com.