Rudd to Resign (Reports say), Good for Australian Dollar

Australian PM Rudd is coming under stronger domestic pressure as the opposition to the resource tax gains momentum. There have been press reports of a leadership challenge and a local report claims that a key bloc in the Rudd's Labor Party is supporting Rudd's deputy Julia Gillard. Rudd has now called a press conference and SKY TV is now reporting he is prepared to step down. A national election does not have to be called until next April.

The Australian dollar softened initially, but the risk appears to be on the upside after the political shock wears off. This will add to the likelihood that the tax is diluted. The tax was a negative on an otherwise generally constructive macro economic picture. The rate hike cycle is mature, but an additional rate hike before the end of the year cannot be ruled out. The relatively strong banking system, commodity exposure, proximity to China round out a generally bullish case. Look for $0.880 near term and the $0.8850.

FXA is the ETF for the Australian dollar.