Last night’s resignation by Foreign Minister (and ex-Prime Minister) Kevin Rudd has further inflamed political tensions within his Labour Party over who should lead it into the next election. After weeks of intense speculation surrounding her leadership, current Prime Minister Julia Gillard expressed her disappointment at Rudd’s decision, which the latter claimed had resulted from her failure to express her ongoing support for him. Recall that Gillard replaced Rudd as Prime Minister in a leadership coup less than two years ago. At the time, Rudd was chastised for his leadership style, which Treasurer Swan described as “dysfunctional” and “deeply demeaning”. In a clear signal that Rudd was tilting at the leadership, he claimed that his party needed to decide who was best-placed to defeat Opposition Leader Tony Abbott at the next election. Abbott’s party currently enjoys a huge lead of 14 percentage points over the Labour Party, according to a recent Newspoll.

Gillard has called a news conference for tomorrow, where she is expected to announce a vote for next Monday on the leadership question. Although Gillard appears to have widespread support within her cabinet, a recent poll suggested she is increasingly unpopular with the electorate, with 57% of voters preferring Kevin Rudd as Prime Minister compared with 35% for the current leader. One danger is that the leadership question could splinter the Labour Party, which is currently in government with a wafer-thin majority courtesy of a shaky pact with the Greens and some independents. Gillard is expected to win a leadership poll but, should Rudd be victorious, then there may be a snap election should he be unable to forge a new pact with the Greens/Independents.

Clearly, the Labour Party is fracturing, and at a time when the polls suggest that many will lose their seats at the next election. It is a very difficult time for the party. It may like Gillard, but she is unpopular with the public and would almost certainly condemn the party to electoral defeat. Rudd has much better standing with the electorate, but he has burned a lot of bridges within the party. Ultimately, electability is usually what counts in these situations. If the Labour Party chooses Rudd next week, then it might be facing an election a lot sooner than it bargained for, one that current polls suggest it would lose handsomely.

Also, if Rudd is victorious, it is unlikely to do the currency any favours. He has some previous form in that he pushed hard for the introduction of a mining tax back in 2010 that was both surprising and roundly criticised by the large mining companies.

In the near term, there is considerable potential for a bumpier time for the AUD given the likelihood of significant political instability.