Election uncertainty a factor dampening the AUD
The approaching election in Australia is a negative for the AUD. Perhaps the budget is a reminder that the election may come sooner than expected. The election is negative because it generates policy uncertainty and reminds the market how unstable government in Australia has been for the last decade.
The Australian economy has performed reasonably well, despite weak governments, although it has struggled to provide strong policy direction that might have helped drive the economy out of its long period, post-mining boom, of sub-trend growth since 2013.
Excessive reliance on easy monetary policy and aggressive bank lending over this period has resulted in an alarming rise in household debt and house prices. Mis-managed energy policy is widely considered to have led to under-investment and electricity shortages in the last year.
At this stage, the next election looks hard to call, with the risk of another change of government. Labor opposes company tax cuts, and supports personal income tax cuts. But perhaps more important for the market is its plans to significantly reduce tax breaks for housing investment, a potential negative for the housing market that is more vulnerable after peaking in the last year.
The earliest possible date for an election is 4 August this year. With a half senate election required by 18 May 2019, a full national election is expected to be held by this date.
Betting odds favour the opposition Labor Party winning the next election (69.4% probability) vs 37.7% for the ruling Liberal-National Coalition (Australian Politics odds – CrownBet.com.au).
Recent polls show the race tightening, but the Labor retains a lead on a two-party preferred voting basis of around 52% to 48%.