Way Under Down Under

Don't look now, but the trigger event that may cause the next downward leg in the markets may not have anything to do with Greece, the European Union, China, Russia or even the US.  It may be this weekend's hung parliament election in Australia that may be the catalyst for chaos.

Australia’s dollar may fall and equities investors may look to other markets after the nation’s federal election failed to deliver a majority government for the first time in 70 years, according to market analysts.

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.”

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 government. The talks, which may last for days as election officials count postal votes, stoke uncertainty about issues such a Labor’s proposed mining tax, infrastructure investment and carbon trading. 

So what the hell does all that mean for the global picture?  Investors have been increasingly avoiding the volatile US dollar, euro, and Japanese yen...and they've been investing heavily in Australia's dollar.  Now all of a sudden the Australian dollar looks unstable as hell thanks to nobody being in charge.  Everyone's looking for the exits, as Tyler Durden explains.

As has been long pointed out on Zero Hedge, the AUD carry pair (either with the JPY, USD or EUR) has been the primary driver of market funding over the past 3 months (we have also pointed out for about 15 weeks that fund outflows are the loud alarum bells for an upcoming stock crash, a topic finally picked up by the NYT). In which case, courtesy of the Australian hung parliament, the market may be in for some tumultuous moves when the forex market opens at 3 PM EST, and looks certain to cut the weekend of the Liberty 33 trading desk early as they plan preparations for what could be a broader based sell off driven by carry evaporation. Reuters explains why the AUD is expected to drop a cent or more when trading resumes: "Australia's two major parties wooed independent lawmakers on Sunday after an inconclusive election left the nation facing its first hung parliament since 1940 and set financial markets up for a sharp sell-off. The Australian dollar and shares are likely to slide when trading resumes on Monday, analysts said, with the vote count threatening to drag on for days and both the ruling Labour party and opposition seemingly unable to win a majority." In other words, with the market correlating nearly 100% with the AUD, all those who went long this market despite the second Hindenburg Omen confirmation in a week, may be in for a rude awakening. 

Odds are pretty good a lot of people are going to get hurt in the markets right now...those who are left, that is.  As goes Australia's dollar carry trade, so goes the global markets right now, and that just went belly up.

Could be a very interesting Sunday afternoon here.