- AUD rebounds after Morrison sees off Dutton in scrap for PM's job.

- Business friendly Morrison a "moderate", Dutton a "conservative".

- Domestic politics now fading as AUD driver, "trade war" back in focus.

© Greg Brave, Adobe Stock

The Australian Dollar rebounded Friday after the Liberal Party's "moderate" Scott Morrison prevailed over "conservative" rival Peter Dutton in a Canberra scrap to replace the now-ousted Maclolm Turnbull as Prime Minister.

Price action comes after Turnbull lost a ballot of confidence, the second inside of the last week, by a margin of 40-45 votes. He called the first ballot himself and won but was cornered into the second by rival Dutton, who said he had secured the numbers to oust Turnbull and win himself but was then pipped to the post by his own rivals.

The regime change comes ahead of a general election that is expected to be held no later than May 2019, which has seen infighting grip the coalition government amid a poor polling performance and following a series of scandals.

"Its probably the best the markets could have hoped for," says Stephen Miller investment strategy adviser at Grant Samuel. "And I think that is why we seeing a little bit of a relief rally in the Aussie."

Positioning had become heavily slanted against the Aussie this year so the rebound Friday may be due to speculators taking profit on their short-positions, according to Micheal Sneyd, global head of FX strategy at BNP Paribas.

Sneyd is referring to a phenomenon called a 'short squeeze' that occurs when markets are betting heavily against a currency before a sudden positive surprise draws new money toward a currency, pushing it higher.

This then leads sellers to close out their positions, which requires them to buy back the asset they sold, which then generates more demand and pushes prices even higher.

"Morrison is seen as more market-friendly than populist Dutton, though perceived political risk in Australia needs to be kept in context, with the incumbent government highly likely to lose a general election due before May," says Adam Cole, chief currency strategist at RBC Capital Markets.

Reportedly-heightened tensions between Canberra and Beijing may also weigh further on the Aussie during the weeks ahead.

Australia's government says it will not allow companies “likely to be subject to extrajudicial directions from a foreign government that conflict with Australian law” to participate in the roll-out of its 5G network, which was seen as a ban targeting Chinese companies.

The Australian Dollar is particularly sensitive to all things China-related because the world's second largest economy is also the Australia's largest trade partner, buying the lion's share of its commodity exports.

The "trade war" between the US and China is also a hot button issue for the Aussie and all economies dependent on China.

"We would not expect domestic political developments to remain the dominant driver of the Aussie for long. External developments, such as the softening global growth outlook and building trade tensions, are far more important for the outlook. There was little encouragement overnight to suggest that the more challenging external environment is set to change any time soon as US and China trade negotiations ended without a clear breakthrough," says Lee Hardman, a currency analyst at MUFG.

The AUD/USD rate was quoted 0.72% higher at 0.7295 Friday while the Pound-to-Aussie rate was down 0.36% at 1.7618. The Aussie was also higher against all other G10 currencies.

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