Australian Dollar: Joyce Disqualification Adds to the Currency's Headache

The Aussie’s underperformance comes after a disappointing set of September inflation numbers, downward pressure on commodity prices and the loss of the Government's wafer-thin majority in Parliament.

The Australian Dollar fell into the final session of the week after the Government lost its parliamentary majority in Canberra, adding political uncertainty to the mix of drivers weighing on the currency.

The Aussie, had already been struggling following the lower-than-expected inflation print mid-week and sliding commodity prices induced by a resurgent US Dollar.

The Australian High Court ruled Deputy Prime Minister Barnaby Joyce should be disqualified from office owing to his dual-citizenship, ensuring Malcolm Turnbull’s party lost its one seat majority ahead of a by-election planned for December.

Joyce and four other politicians were wrongly elected because they held dual citizenship, the others quit in July. Joyce renounced New Zealand citizenship in August and has pledged to re-contest his seat.

The Government will be without a working majority in the interim although independent MP Cathy McGowan has put out a statement saying she will continue to provide Turnbull with a confidence and supply vote.

“The events will be unwelcome for the Turnbull Government which has been behind in the polls for over 12 months,” says Cherelle Murphy, a senior economist at Australia & New Zealand Bank (ANZ).

Friday’s ruling has no major policy implications but it does inject a layer of uncertainty into the Aussie Dollar story - and currencies dislike uncertainty.

“It’s debatable how much impact this will have on the economy. There was an immediate market reaction by the AUD and equity markets, but it was very small,” adds Murphy confirming that for now the event will likely be low-key in nature for the currency.

The Pound-to-Australian-Dollar rate was broadly unchanged Friday, at 1.7134, at a time when Sterling is on the back foot against all other G10 currencies, in short the Aussie should be doing a whole lot better.

Meanwhile, the greenback gained 0.25% on the Aussie to be quoted at 1.3079, taking its gain for the week close to 2.5%, which makes for an AUD/USD rate of 0.7646.

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A large part, but not all, of the Aussie’s underperformance comes as downward pressure on commodity prices intensifies in the face of a surging US Dollar.

The Australian Dollar derives a hefty amount of value from the country's export of raw materials, such as iron ore, coal and natural gas. When prices are high the currency finds support.

Because commodity prices tend to be valued in US Dollars, a rise in value in the Dollar tends to make commodities more expensive, therefore lowering demand.

This in turn pushes the value of the commodity prices down.

The greenback has risen in recent days due to speculation around who will lead the Federal Reserve from February and hopes the Trump administration will be successful in driving tax cuts and reforms through congress this November.

Dalian Commodity Exchange iron ore futures prices fell by 3.5% to CNY 434.5 during early trading in London, almost a 2017 low, which puts the Dollar price for China-bound iron ore around $65 per tonne.

“As the commodity currencies are driven by U.S. Dollar strength the next stop for AUD/USD should be the 50-week SMA near 0.7630," says Kathy Lien, managing director of foreign exchange strategy at BK Asset Management. "The RBA still has no plans to raise interest rates and this steady policy should keep AUD under pressure." 

Political uncertainty and tumbling commodity prices come closely on the heels of September’s Australian inflation numbers.

Economists and strategists had expected headline and core consumer price growth to touch 2% during the month, the lower bound of Australia’s 2%-3% inflation target, for the first time in two years.

This could have seen bond markets bring forward expectations of a Reserve Bank of Australia rate hike so foreign exchange rates reacted in advance.

But it wasn’t to be as both inflation numbers surprised on the downside, leading to renewed concerns over a possible loss of momentum in the Australian economy.

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