The Aussie dollar jumped 0.4 of a percentage point to US$72.82 after the Treasurer Scott Morrison secured the leadership of the Liberal Party on Friday.
Mr Morrison announced that Josh Frydenberg, who was overwhelmingly elected as the new deputy leader of the Liberal Party, would become the Treasurer.
Kerry Craig, global market strategist of JP Morgan Asset Management said the dollar bounced back due to the return to stability and who emerged as Prime Minister.
“You’ve had a period of uncertainty building all week and the outcome has been more favourable, due to the new Prime Minister being viewed as market and business friendly,” said Mr Craig.
Mr Craig said that the market might not have responded that way if Peter Dutton had beat ex-treasurer Scott Morrison for the top role.
“I think the market would have gone down had Dutton won because there is reservation about his policy outlook,” he said.
The Friday upswing came after a rough few days of the AUD after it slipped 1.4 per cent to US$72.48 cent in the 24 hours leading up to the leadership contest.
This reflected the steepest drop among Group-of-10 currencies against the US dollar.
Shares were also affected with the S&P/ASX200 index closing 21.6 points or 0.3 of a percentage point lower on Thursday to 6,244 points.
The vulnerable sectors of finance and utilities were affected most by the leadership uncertainty as their regulatory futures remain uncertain.
ANZ Bank was hit the worst with a 1.7 per cent drop to $28.72 and Commonwealth also fell 1.6 per cent to $70.75.
The shares did bounce back on Friday morning by 0.3 of a percentage point to 6,244 points and immediately following the announcement of Morrison the S&P/ASX200 jumped up to 6, 263 points.
Brad Bugg, head of multi-asset income at Morningstar Investment Management Australia, urged investors to ignore the political noise and focus on fundamentals.
“Given that political circumstances are so difficult to predict, we’d recommend putting them to one side and focusing on valuation instead.”
Mr Bugg said that there was no direct correlation between politics and the movement of the markets despite how tempted people can be to make one.
“There’s no causal link between politics and what happens in investment markets. The two are very separate. Although we are very tempted to draw a line from one to the other, that can be a real mistake,” Mr Bugg said.
Vice President of Moody’s Investors Service Martin Petch agreed with Mr Bugg in a statement that said the leadership of the party had very little implications, particularly to the credit rating.
“Australia’s AAA rating is supported by the country’s very high level of economic strength and moderate level of government debt,” said Mr Petch.
