Last weekend, Australia conducted its general elections. But unlike Lady Gaga who can now breathe a sigh of relief after winning the twitter crown from Britney Spears, current Prime Minister Julia Gillard and opposition leader Tony Abbott have at least a week of nail-biting to do as they await the election results.
Before we get ahead of ourselves, let's have a quick crash course on Australia's electoral system.
The general population votes for 150 policymakers who will become members of the country's legislating body, which is referred to as the House of Representatives. Usually, these policymakers belong to political parties but there are a few who run independently. The leader of the party which earned the most seats is appointed as Prime Minister.
Since 2007, the Labor Party, presently headed by Gillard, has won the majority. However, the Liberal Party led by Tony Abbott may have a shot at power this year. According to the Australian Electoral Commission, 76 seats needed to be won in order to bring home the bacon but each party only has 71 seats currently. Oh man, this race must be tighter than Katy Perry's skin-tight jeans!
Wait just a minute. What do all these have to do with the Australian economy and the currency market? As they say, the fate of the proposed mining tax rests on the results of Australia's elections and this could determine the outlook for their economy and of course, the Australian dollar.
You see, former Prime Minister Kevin Rudd stepped down from his post after the mining industry threw tantrums because of the 40% mining tax proposal. Gillard then stepped up to lead the Labor Party, became Prime Minister, and made some compromises to cut the tax to just 30%.
Gillard's wisdom in working towards a compromise gave a huge boost of confidence towards her party. Still, the Liberal party is gearing up its campaign on the legs of completely eliminating the mining tax!
Why is this tax mining law such a huge issue, anyway? Well, let me refresh your memory. In one of my old articles, I highlighted how the mining sector makes up 37.6% of Australia's exports. A 30% tax can either make or break the industry, as it could hinder future investment in the mining sector.
All this political eenie-meanie-miney-mo ain't healthy for the Aussie right now and it doesn't help that investors are toning down their risk-taking. What more if the election results reveal that neither party secured majority of the seats in Parliament? I'm talkin' years of political uncertainty in the Land Down Under! You've got one party that wants to tax the crap out of its largest export industry, while the other wants to eliminate it. You think these two parties will get along? I'm not too sure about that but my guess is this wouldn't look to good on the investment portfolio.
Now this possible stalemate reminds me of that hung parliament situation that the UK got itself into earlier this year. Months of speculation that the UK would end up with a minority government made the pound heavier then and, when the UK did end up with a hung parliament, its currency fell even lower. Not even talk of a coalition government was enough to brighten the pound's mood at that time and I'm inclined to think that the Aussie could suffer the same fate. Talk about history repeating itself!
The charts also foretell that the Aussie could be at the brink of a breakdown. Aside from that neat head and shoulders formation on AUDUSD's 4-hour chart, the pair also made a huge gap down over the weekend, suggesting that the bears are already growling.
It seems like the odds are tilted 2-to-1 against the Australian dollar. If the Labor party emerges triumphant or if a minority government is in the cards, that Aussie breakdown could get signed, sealed, and delivered! But if the opposition enjoys a sweet victory, it could boost the Aussie's spirits with their vow to squash the proposed mining tax. My my, the Australian dollar must be on tenterhooks awaiting the results of the elections... And so am I!