Significant domestic political issues sometimes affect the demand and supply of a currency by causing capital inflows and

outflows. When investors are concerned about political issues there is a risk of flight to quality/safety or capital repatriation. This is particularly the case when investors are worried about convertibility that is, the ability to exchange the local currency for a foreign currency. Political decisions can bring risks as well as opportunity to investors. A change in the political landscape can lead to an influx of capital investment or divestment. One example is Chinas entry into the World Trade Organization (WTO). With it comes increased trade possibilities and possible Yuan Renminbi convertibility. In Australias case, it might be the free trade agreement with the United States. Government elections usually introduce a degree of uncertainty into financial markets. The possibility of a change in government and economic policies can potentially weaken a currency. The resulting degree of uncertainty relates specifically to the potential degree of change in economic policy and direction that such a change in government may cause. Political risk and uncertainty for a countrys currency may not even relate to matters within its own borders. It may relate to its region or even a broader global risk. For example, in mid-1998, at the time of the so-called Russian Crisis, where the Russian currency devalued sharply, the regional European currencies also fell as a result of related selling of East European currencies. If a country is politically unstable, foreign investors are less likely to invest money in that country, due to the perceived risk of the currency depreciating. Conversely, so-called strong currencies are prized for their supposed safe haven status in times of uncertainty. Historically the US dollar and the Swiss franc have been the most popular in times of uncertainty. An example of political turmoil occurred during the Asian currency crises. A series of forced currency depreciations by countries in the East Asian region increased uncertainty that some governments would (or would not) introduce currency controls, among other measures, to curb the economic instability that the sudden falls in value of their currencies had produced. Failures by government to quickly address such tensions usually lead to even more instability. Political stability can be read more widely to also include industrial relations stability. Any country with an unstable industrial dispute-settling process, or which has prolonged labour conflict, is likely to attract negative market attention. This often results in the currency being sold off. Such uncertainty is generally seen as having only a short-term influence on a currency, e.g. where foreign investors withdraw from a countrys currency in times of political

uncertainty and industrial disputation, and then possibly re-enter the market once the risk has reduced.