As Australia votes, can the Aussie dollar be an unlikely winner?

Trump at the centre of another election

Australian voters will be casting their ballot on Saturday, May 3, for a new government, just days after Canadians voted in a federal election of their own. Similarities have already been drawn about the ‘Trump factor’, with the US President’s policies influencing voters’ decisions domestically. Like in Canada, the party displaying the greater defiance against Trump’s bullying is seeing a rise in opinion polls, forcing the pro-Trump party to distance itself from some of the right-wing populism it had adopted.

In Australia, it is the incumbent Prime Minister Anthony Albanese who is standing up to Donald Trump by not holding back on his criticism of America’s tariff spree, boosting his Labor party’s standing in the polls. But the opposition Liberal party’s Peter Dutton hasn’t been having such an easy time and has had to walk back on some of his Trump-like policies, such as stipulating government workers to return full-time to the office.

Labor leads as Trump upends polls

Having started the race four points behind the Liberal-led Coalition, Labor’s popularity has been steadily rising since late February, gaining even more traction after Trump’s ‘Liberation Day’. However, despite the latest polls giving Labor a lead of more than two-and-a-half points in the two-party preferred vote, a hung parliament is the most likely outcome.

There are 150 seats up for grabs this election in Australia’s lower House of Representatives, down from 151 in the current parliamentary term. This means that 76 is the number to beat for an overall majority.

Labor is currently leading a minority government and would probably try to form an alliance with the Greens and independent members of parliament should it receive the most votes on Saturday. There’s also a sizable probability of Labor winning a majority, as voters are more likely to swing towards Labor than the Coalition given Albanese’s much higher approval rating compared to Dutton’s.

Can election outcome shape RBA policy?

But even if the election were to result in a shock victory for the Coalition, the risks to the Australian dollar are not too dissimilar whichever party wins. Both main parties are pledging to cut taxes, increase spending on health and defense, and build more homes. Whilst there are some distinct differences about how each party wants to achieve its goals, on the whole, it seems that Australia is entering an era of bigger government deficits, which could potentially have an inflationary impact on the economy.

The Reserve Bank of Australia has only recently started to cut interest rates and although another 25-basis-point reduction is almost certain at the next meeting on May 20, underlying inflation has only just fallen to within its 2-3% target band. One can argue that the additional fiscal support that is expected from the next government would not really be too stimulative as the economy is facing significant headwinds right now from the global trade war that looks set to hurt Australia’s biggest trading partner – China – the most.

So what are the main policy differences?

When it comes to the hot issues – the cost of living crisis, healthcare and housing – both parties are promising big changes. Tax cuts have been the main battleground as Australians have been feeling the bite of higher inflation. Labour is proposing a permanent A$1,000 tax deduction on work-related expenses for working taxpayers, as well as a cut in the lowest income tax rate. The Coalition, on the other hand, is trying to lure voters with a one-off tax rebate of A$1,200 and a reduction in fuel duty of 25 cents to help ease the pain for households.

Healthcare has been a surprise election issue, amid growing sentiment that the country’s globally revered universal health system is failing. Labor wants to boost health spending by A$8.5 billion, with the Coalition pledging to match that figure.

On housing, Labor’s focus is to build 100,000 new homes at a cost of A$10 billion to relieve the country’s worsening housing shortage, which has been exacerbated by high immigration. The Coalition’s plan is somewhat different, though, offering various incentives to first-time buyers and changing construction rules to make way for 500,000 new homes at a cost of A$5 billion.

Is Australia’s AAA credit rating at risk?

Thus, whoever wins the election, public borrowing is poised to rise sharply in the coming years, and this has prompted a credit warning by S&P Global Ratings over Australia’s prized AAA rating for its sovereign debt.

The good news is that Australia has a comparatively attractive debt-to-GDP ratio of around 30%, which is one of the lowest among major advanced economies. So even though this is high by Australia’s standard, the government has significant scope to lift borrowing levels.

The bad news is that a large tax cut package and a sharp increase in spending could deter the RBA from slashing interest rates aggressively. With the cash rate already at a more than decade high, if fiscal policy works against monetary policy, Australians won’t be able to enjoy much lower borrowing costs anytime soon.

Aussie: one eye on election and the other on China

For the Australian dollar, the scaling back of rate cuts bets would be an additional lift amid the persisting weakness of the US dollar. The greenback’s outlook is increasingly bearish, with or without the trade war damage, as the Fed will likely cut rates either way.

Similarly, the risks to the aussie/dollar pair are tilted to the upside in either scenario. However, there is a high level of uncertainty about how China will navigate itself out of the trade conflict with Washington, and this has a direct bearing on the Australian economy.

In this respect, the aussie could perform better under Labor than under a new Coalition government, as Albanese would probably adopt a somewhat looser fiscal policy and is more likely to pressure Trump to lower tariffs on both Australian and Chinese imports.

Hence, in the surprise event that Labor obtains enough seats to form a majority government, the aussie could extend its latest recovery and aim for the $0.6550 level, which is the 61.8% Fibonacci retracement of the October 2024-April 2025 downtrend.