Move over, Brexit! There’s a new drama in the forex scene! In case you missed it, Australia’s 2016 federal elections has been hogging the spotlight lately and so far its results have been making risk-takers nervous.
Back up. What’s the election all about?
On May 8, 2016 Prime Minister Malcolm Turnbull advised the Governor General to issue the writs for a double dissolution. Under the Australian Constitution, a double dissolution is used to resolve deadlocks between the House of Representatives and the Senate. The event calls for a full election after “dissolving” the Congress and the entire Senate.
A double dissolution is “triggered” when the Senate rejects a bill passed by Congress twice in the same session. This year there are three bills that fit the requirements:
- Building and Construction Industry (Consequential and Transitional Provisions) Bill 2013
- Building and Construction Industry (Improving Productivity) Bill 2013
- Fair Work (Registered Organisations) Amendment Bill 2014.
The Governor-General accepted Turnbull’s advice on May 9, marking the 7th double dissolution in history. Then, after eight weeks of campaigning, the election was held last weekend.
So who’s winning?
It’s too close to call. With 78.8% of the votes counted, the Liberal-National coalition is almost (but not quite) there with 73 seats while the Labour Party, led by Bill Shorten, has 66 seats and other parties have 5 seats. A party needs 76 seats to claim a majority.
Unfortunately, it might take WEEKS before we see a clear result. Thanks to the tight nature of the race, all the remaining votes will be more closely scrutinized. It also doesn’t help that revisions in the Senate votes’ counting procedures require more time than the usual.
What’s next for Australia’s government?
It’s a waiting game until we see the results. Here are the more popular scenarios being considered:
1. A party wins majority of the votes
Both the Labour and the Coalition parties are hoping to get the required 76 seats. If one of them does make it though, then it will still deal with a ridiculously slim majority. This means that the party would have to fight tooth and nail each time that it wants to pass a bill.
2. Minority government
A Hung Parliament is looking like a more likely scenario at the moment. If no party claims a majority, then a party would need cooperation from members of the other parties in order to gain a majority. I’ve seen enough House of Cards episodes to know where this is going…
3. Another election?
If neither the Labour nor the Coalition party gets the required 76 seats and neither can cough up enough outsider supporters to reach a majority, then a second snap election might be on the table.
Why should forex traders care about the results?
Good question, my young padawan. Prolonged uncertainty over the elections, a hung Parliament, or a slim majority could hurt the Australian economy because the government needs to address some issues ASAP.
More specifically, market players are looking for sound fiscal policies that would address Australia’s ballooning budget deficit. Australia’s government debt-to-GDP ratio hit 36.8% in 2015, the highest on record. Yipes!
Without decisive plans to curb government spending, credit ratings agencies like S&P and Fitch are already sounding their warning bells. Just this week both agencies have downgraded their growth outlooks from “stable” to “negative” despite keeping Australia’s AAA rating.
Even Aussie traders know that uncertainty is bad for the currency. The Aussie gapped lower over the weekend when the first election results failed to produce a clear majority. Focus has since turned to other catalysts like Brexit, FOMC, and the NFP, but I’m pretty sure the Aussie traders haven’t seen the last of election-led price action.
For now it looks like Aussie traders are willing to wait for the results to trickle in. A majority vote could hint at speedier solutions against the budget deficit, while uncertainty or delayed results could mean more dillydallying for the government.