Employment Gains Catalyze Ascending Australian Dollar

Market Trends - 18/05/2017

Following the more dovish meeting minutes published by the Reserve Bank of Australia earlier this week, data released overnight by the Australian Bureau of Statistics confirmed that the jobless rate for the country fell to its lowest point in 3 months.  After reaching 5.90% back in February, the decline to 5.70% in April should give policymakers additional confidence following a more downbeat assessment delivered by the RBA earlier in the month.  Apart from headline optimism for better employment fundamentals, strong labor force participation and job creation figures signal that the Central Bank may be able to move away from record low interest rates earlier than previously anticipated.

One concerning development that may continue to weigh on policymaker sentiment is wage growth, which may be unable to overcome the higher pace of inflation.  Nonetheless, with inflation reaching the midpoint of the 1.00% to 3.00% target set by the RBA, normalization of rates may arrive earlier than previously anticipated. The kneejerk reaction to the announcement was a rally higher in the AUDUSD pair, extending the ongoing 6-session rally.

Even so, the improved labor fundamentals might be overshadowed in the coming months by ongoing efforts to deleverage the Chinese economy.  As Australia’s single largest trading partner, China has an outsized impact on the country’s fundamentals, especially if the government intends to work harder to cool real estate speculation and reduce infrastructure spending.  These two areas in particular account for a significant amount of demand for Australian exports of iron ore, copper ore, and aluminum.

While Chinese policymakers have already set their sights on lower GDP growth, the real impact may be more readily felt in Australia over the coming months, especially if commodity prices extend their most recent tumble.  However, should the Australian economy be able to sidestep the pullback in Chinese economic activity, the Reserve Bank could find itself under increased pressure to shift its stance on policy, beckoning higher interest rates after standing at record low rates since last August.  In the meantime, unless the dollar rebounds, AUDUSD has more room to climb after trending lower since March.

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