There was a mild risk going into the weekend that a miraculous victory for the ruling coalition party in Australia. Going into the weekend Scott Morrison was widely expected to be beaten after trailing in the opinion polls for months. However, somehow after his first 9 months as Prime Minister, and after the ousting of Malcom Turnbull last August Mr. Morrison's disciplined approach has seen him take a “miraculous” victory against the odds.
It’s also another upset for the pollsters. It’s not just another upset, but it’s another time pollsters got things totally wrong. It’s becoming embarrassing now! We as traders live in a world of reverse indicators and polls are becoming the biggest one of all. The EU referendum, polls said Remain would win, Leave won. The polls said that Theresa May would win the general election of 2017 by a landslide, she scraped into power, in coalition with the Northern Irish DUP. Of course, most famously of all, polls said there was no way that TV star and Businessman Donald J Trump could ever beat career politician and former first lady Hillary Clinton, yet here we are.
The reaction to the result was seen across Australian dollar crosses with AUDUSD rising to a high of 0.6928 in the wake of the Liberal Party win. The cheer was much needed for those championing a stronger Aussie as May had seen yet more big falls as China/US relations continued to deteriorate.
The pair has been aggressively sold over recent months, the slide breaking first below 0.7000, which was the initial level that got traders worried about further downside. The dovish tone from the RBA has exacerbated the situation, which is why Governor Lowe’s speech on Wednesday will be a key focus, as we are all keen to see just how dovish the central bank can be. The current expectation shows that there is a 55% chance of a rate cut at the RBA’s next meeting on 04 June.
It would seem that the downside in the currency is pricing in at least 2 rate cuts before the end of 2019. Further dovish comments from Lowe on Wednesday would see further downside, however a turn away, or a reluctance to add to the dovish tone could see a continuation of this move, with a test of the 0.7000 level on the cards.
It’s likely to be a big week for the Aussie, but one that has navigated a huge shock in terms of the weekends election results.
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Soaring US yields trigger the wrecking ball effect as yields become a source of volatility for risk, rather than a source of support