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The AUD is suffering from a political impasse after Saturday's parliamentary election delivered the first hung parliament since World War II.
No clear winner emerged from the polls, as Julia Gillard (the Labor incumbent Prime Minister) and Tony Abbott (the Liberal Opposition Leader) both failed to reach the 76 seats needed to form a government.
Following this result, both parties have now begun to court the Independent lawmakers to form a majority to govern. This leaves two possible outcomes:
First scenario: the Independents agree to join one of the two main parties and form an alliance. In this case, their support would come at a price of extra spending, as they are pushing for infrastructure projects. Thus, it could delay the electoral commitment pledged by both party to balance the budget by 2012-2013.
Second scenario: no agreement is reached between the participants. This could lead to another election being held within weeks and heighten the suspense.
Therefore, political confusion is likely to put pressure in the short term on the Australian dollar, as Forex Traders tend to avoid uncertainty. Overnight, the AUDUSD fell almost 0.90% from 0.8935 to 0.8856, before bouncing back.
The pair is now trading close to its support level of 0.8840 with resistance seen just above 0.9010.