Australian dollar likely to sail through the peril of credit rating downgrade

As the counting from last weekend’s election continues the incumbent government led by Malcolm Turnbull is very close from securing a majority government, however, it is still a close call. Mr. Turnbull’s governing coalition has secured 73 seats, 3 short of securing a majority government. Main opposition Labor Party has secured 66 seats. Other small parties have secured 6 seats, whereas 6 seats hang as too close to call as of now. Mr. Turnbull is in talks with the independents to secure his bid to form a government.

Looking at the result, Credit rating agency Standard & Poor has moved Australia’s AAA credit rating to watch, from stable to negative that means Australia could face a credit downgrade if the country hangs in limbo amid political gridlock.

Despite this, we expect Australian dollar is likely to survive the gridlock and even a rating downgrade as the major focus for the market is on the fallouts from the referendum in the UK. Main trouble for the Aussie dollar is not the politics but lower commodities prices, which recently have started to reverse course. We think there has been a major shift of sentiment in the commodities’ market, which as an asset class given the best return so far this year. Moreover, despite the weakness in commodities and drop in business investments, the Australian economy has done well for the past six months riding into its services sector growth, which makes the economy with its higher yield quite a better refuge from Brexit fallouts.

Hence, we prefer to maintain our long call in the Australian dollar against the USD.

Buy Aussie targeting 0.82 against the dollar.