Australian Dollar Vulnerable to Prospects of Labor Party Takeover

Could the next big driver of the Australian Dollar become politics?

Politics is already a key consideration for the US Dollar and British Pound in 2016-2017, and look how significant an influence this tricky customer can hold over movements in these currencies.

Looking at recent developments in Australia, which might appear comical at times, don’t be surprised if it starts to be a serious driver of the Aussie.

Ben Powell, a trader with UBS is looking ahead to potential political scenarios that might influnce the Australian Dollar and says it looks vulnerable to the prospects of regime change in Australia now that the ruling Liberal coalition might lose its majority.

For Powell, the risk from a financial and currency perspective is that the Labor party take control and introduce a set of disruptive policies.

Australia has a bi-cameral system with a lower chamber is the House of Representatives.

There are 150 seats, currently the Liberal led coalition has 76 while the rest have 74.

Section 44a (i) of the Australian constitution prohibits the following from being an MP:

"Is under any acknowledgement of allegiance, obedience, or adherence to a foreign power, or is a subject or a citizen or entitled to the rights or privileges of a subject or citizen of a foreign power."

The Deputy Prime Minister of Australia Barnaby Joyce has been declared a citizen of New Zealand by the New Zealand government.

As per above, this appears in conflict with his being an MP according to the Australian Constitution.

On July 18th commenting on another Australian politician who had been shown to fall foul of the citizenship rules, Mr Joyce commented that:

"It's quite clear that under Section 44, you can't be a member of parliament and have dual citizenship. It's black and white. The outcome is black and white. That's just the way it is."

Joyce has asked for his situation to be ruled on by the High Court.

If he is deemed to be ineligible it seems likely he will renounce his New Zealand nationality and then contest a by-election.

“If he loses that by-election then the government loses its majority. But it could get tricky even before then,” says Powell.

As mentioned the current score in the House of Representatives is 76-74.

“But importantly, the Speaker, Tony Smith, is a member of the government party – and the Speaker doesn’t vote. So the current practical situation is actually 75-74,” adds Powell who believes losing another voter would therefore remove the government's majority by making the effective vote 74-74.

How long might the ruling party be short of Joyce’s vote for?

The shortest ever time between the Speaker of the House of Representatives putting the wheels in motion for a by-election, and the by election delivering a result, is 33 days. The average is 47 days.

“So it seems plausible that the government will be without a majority for at least a month. This is inconvenient and may facilitate the opposition Labour government making demands that put Australia on the path to a General Election. Of course if Joyce loses the by-election then the House will be a 75-75 tie. This again may lead to the dissolution of parliament and an election,” says Powell.

Current polling has the ruling Liberal Party trailing the opposition Labor Party.

From a currency and financial markets perspective, Powell notes Labor have some policies that may be considered as less market and growth friendly than the current government.

These include a Royal Commission into banking which may create regulatory uncertainty; the potential removal of negative gearing with potentially negative impacts on housing; and the potential imposition of a 30% tax rate on discretionary trusts (which have AUM of something like $3.1Tr).

“The current very long position in the AUD seems vulnerable if the chance of a Labor government coming into power in the coming weeks rises. The underlying story of MPs being revealed as secret Kiwis is odd, and perhaps even faintly comedic. But the implication for Australia and related risk may be profound,” says Powell.

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.