An Election Looms Large

How Will the Upcoming Election Impact The AUD/USD?

Posted Sunday, April 7, 2019 by
Rowan Crosby • 2 min read

Australia is just around the corner from another election, with the current PM getting set to announce the date anytime now. This is going to be an interesting election for many investors as the main opposition party is looking to introduce some new policies that could very well have a negative impact on the economy.

With that in mind, there is clearly going to be some risks to both Australian stocks and of course the AUD/USD.

The RBA is already under increasing amounts of pressure to cut interest rates as Aussie bonds continue to get bought up and yields fall.

Many of the major policy changes that the current opposition (the Labor Party) are looking to bring in, relate to property and in particular investors. At this point in the economic cycle in Australia, property prices are falling hard as there is little demand on the back of increased credit tightening. This came about thanks to a huge run-up in prices led by cheap and easy credit.

One big benefit Australian investors get is called negative gearing. Whereby, investors can deduct the money they lose on their investment properties from their income. The opposition is looking to abolish this benefit, which will likely put a fair bit of stress on investors already saddled with record debt levels. It will also surely put the RBA under more pressure to cut rates as well.

Secondly, franking credit refunds are set to be abolished. When a company pays tax on its earnings and then pay a dividend, the tax doesn’t need to be paid again by the investor. That is known as a franking credit and it is a tax perk. The opposition is also looking to remove refunds on franking credits, whereby, those who don’t earn enough money to use those credits get them refunded. So that is mainly retirees and those who look for yield as their key strategy.

Again, this type of move will see money flow out of markets and into other strategies that produce yield. But likely not property.

So at the moment, there is certainly some worries and uncertainty around just how this election will impact investors.

In reality, getting full control of both houses of parliament will be no easy feat for either party and the balance of power will likely be held by the minor parties. So no new changes to these policies are guaranteed.

Bottom Line: If you are trading the AUD/USD, a Labor victory will likely be seen as a negative for the economy and therefore the AUD/USD will potentially fall. Vice versa if the Liberal Party can retain control, we might well see a strong rally in the AUD/USD in the days following the final result.

It is certainly a good trade if you are fast and able to follow the news as we have seen in recent elections.

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