Australia Dollar Falls on Hung Parliament; Resource Stocks Gain

Aug. 23 (Bloomberg) -- Australia’s dollar fell after the nation’s federal election failed to deliver a majority government for the first time in 70 years.

Neither Australian Prime Minister Julia Gillard nor opposition leader Tony Abbott gained an outright majority in the Aug. 21 vote, meaning one side must win negotiations with independent lawmakers to form a government. Stocks of mining companies including Melbourne-based BHP Billiton Ltd. and London-based Rio Tinto Group rose on optimism the election results will result in a proposed mining tax will be either scrapped or diluted.

“The Australian dollar is going to stay heavy,” said Phil Burke, chief dealer for global foreign exchange and rates at JPMorgan Chase & Co. in Sydney. “Markets don’t like uncertainty, and there’s also a risk that the offshore markets haven’t focused too much on this election -- so it could be the case of a late awareness to potential problems.”

The nation’s currency slid 0.6 percent to 88.87 U.S. cents as of 11:12 a.m. in Sydney and has declined 1.7 percent this month as opinion polls foreshadowed an increased chance of a minority government.

Australian bond futures fell, with the 10-year contract for September delivery at 95.065 on the Sydney Futures Exchange from 95.095 on Aug. 20. The implied yield on the futures rose three basis points to 4.935 percent.

Australia’s benchmark S&P/ASX 200 index was little changed at 4,429.90 from 4,430.90 late last week. The materials index, which includes resources stocks, climbed 0.8 percent. BHP advanced 0.7 percent, rising for the first time in four days, while Rio climbed 1 percent.

‘Political Uncertainty’

Australia’s dollar “will bear the brunt of the uncertainty,” said Su-Lin Ong, senior economist at RBC Capital Markets Ltd. in Sydney. “Political uncertainty, a more unstable government, an obstructionist Senate, and the risk of medium term fiscal slippage as the minor parties exert their influence in a new government are clearly negative for the markets.”

Gillard’s Labor Party has 71 seats out of 150, and Abbott’s Liberal-National coalition has 72, as of 10:34 a.m. according to the Australian Electoral Commission’s website in Canberra, after officials counted 74.93 percent of the vote on a two-party preferred basis.

Four seats are undecided while two independents and one Greens party member were elected. Seventy-six seats in the lower house are needed to form a government.

Mining Tax

Talks with independent law makers, which may last for days as election officials count postal votes, have stoked uncertainty about issues including the proposed mining tax, infrastructure investment and carbon trading. Abbott has vowed to scrap Labor’s proposed 30 percent levy on iron ore and coal producers.

“A hung parliament and negotiations with the independents should not necessarily be a negative for the resources sector,” said Stephen Roberts, a senior economist at Nomura Australia Ltd. in Sydney. “If anything it should be a small positive,” as the Labor party may be forced to moderate the tax to win support from the independents.

The final result of the election, called by Gillard five weeks ago within a month of her ousting former Prime Minister Kevin Rudd, may not be known for days, analysts said.

‘Very Stable’

“We don’t know for sure what the outcome is going to be, but there is no reason why we couldn’t have a successful period ahead with a minority government,” Graham Bradley, president of the Business Council of Australia, said in an interview on the Australian Broadcasting Corp.’s Inside Business program yesterday. “I don’t think business wants any further hesitation when it comes to the reform priorities” such as securing Australia’s electricity and gas supplies, Bradley said.

A key issue during the election campaign was management of Australia’s economy, one of the few to skirt last year’s global recession, after the Labor government spent A$42 billion ($38 billion) distributing cash to households and on schools, railways and hospitals.

Helped by a rebound in demand from China for raw materials such as coal and iron ore, investment in Australia’s mining industry has intensified, driving down the jobless rate to 5.3 percent, almost half the level of the U.S. rate.

The rebound in employment was among reasons policy makers led by Reserve Bank of Australia Governor Glenn Stevens raised the benchmark lending rate six times between October and May to 4.5 percent, the most aggressive monetary policy tightening by a Group of 20 member.

Acting as caretaker Prime Minister, Gillard told reporters yesterday in Melbourne that Australia has a “very stable” democracy with “clear conventions” on the continued operation of government.