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Why a Rudd win could mean more drubbing for Aussie

Australian Prime Minister Kevin Rudd
Chris Hyde | Getty Images
Australian Prime Minister Kevin Rudd

With opinion polls indicating a win for the opposition Liberal-National coalition party at the closely-watched Australian elections next month, financial markets are, for the most part, pricing in the likelihood of a change in government.

But, should the incumbent ruling party stage a surprise victory, analysts say the already battered Australian dollar would be the biggest casualty.

(Read more: Here's how you can trade Australia elections)

According to Scott Cavanough, senior vice president of financial markets at Compass Global markets, the current ruling Labor party - led by Prime Minister Kevin Rudd - is incapable of tackling the country's deficit and for it to stay in power would send the Aussie dollar into another free-fall.

"If there is a change in government, the new government would balance the books and get everything back in the black which would be very positive for the Aussie," Cavanough said.

"(But) if the current government is re-elected, at this stage that will put significant downward pressure on the Aussie... it could go as low as $0.80," said Cavanough. His target represents a 13 percent downside for the currency, which traded at $0.92 at midday in Asia on Monday.

(Read more: Why a Rudd Revival Spells Bad News for Aussie Stocks)

The Aussie dollar has fallen 11.5 percent against the U.S. dollar this year, as the economy continues to face a plethora of headwinds, including the impact of a slowdown in its largest trading partner, China, the possible end of the country's resources boom, along with a substantial budget deficit, which the government forecast will rise to over A$30 billion $27.5 billion) for the fiscal year ending in June 2014.

As part of its election campaign, the opposition party has accused the government of letting spending get out of control and has promised to cut government spending and improve the budget's bottom line if they gain power.

Cavanough said such a move would be beneficial for the Aussie. "At this stage, the (government) spending is out of control... it's not sustainable for a country this size," he noted.

Still, some analysts warn the said steps towards tightening fiscal policy and cutting the deficit could hamper a recovery in the economy, which would put pressure on the Aussie.

(Read more: Can Rudd Stop the Rout in the Aussie Dollar?)

"The concern would be that if they (the Liberal-National party) were to start cutting and cutting hard, then you would be putting more upward pressure on unemployment, particularly for the public sector, so that would be quite negative for the Aussie dollar," said Evan Lucas, market strategist at IG Markets.

But IG's Lucas says the policies by the opposition party are overall positive for the currency.

"Taxation on companies is supposed to drop by 1.5 percent. If that is the case that will create a bit more breathing space for companies and could give the exporters room to move, which will be positive for the Aussie," said Lucas.

—By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie

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