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The Australian Dollar Slips on Wage Figures but Trump's Renmimbi Plan is Good News 

Image © Desiree Caplas, Adobe Stock

- AUD slips after uninspiring wages report hits ahead of jobs data.  

- But optimism around U.S.-China trade deal may cushion the AUD.

- Bloomberg News reports Trump seeking China pledge on the CNY. 

The Australian Dollar slipped Wednesday after final quarter wage data failed to keep an earlier rally by the Antipodean unit alive, but President Donald Trump's reported push to prevent China devaluing its Renmimbi in the future has scope to be a significant positive for the currency. 

Wage packets grew by 0.5% during the final quarter of the year, down from 0.6% previously and beneath the consensus for an unchanged reading of 0.6%. Nonetheless, that still left the annualised rate of wage growth steady at 2.3%.

That's far below the 20-year average of 3.2% and significantly less than the 3.5% rate of growth the Reserve Bank of Australia (RBA) has previously said it would like to see in order to feel confident that households will be able to sustainably deal with rising levels of debt. 

"The softer number suggests that the pass through from the earlier minimum wage rise wasn’t as large as expected," says Jack Chambers, an economist at Australia & New Zealand Banking Group. "The slightly disappointing WPI headline number won’t be enough to change the RBA’s outlook for the labour market."

Chambers says wage growth should still pick up over the coming years because Australia's economy is still creating jobs at a healthy clip and this is leading to a fall in the number of people who are unemployed as well those who are employed but unable to find the amount of work they desire. 

ANZ's view is this steady kind of growth will be enough for the RBA to maintain its current "neutral" interest rate stance for a while yet. Chambers says it would take a lasting deterioration in the jobs market for the RBA to start thinking more seriously about a change of policy.

"Despite a sideways move in the annual rate of wage growth there are some encouraging signs in the data. Wages growth including bonuses rose by 0.7% in the quarter, taking the annual rate up to 2.8%. This is the strongest rate of growth since Q4 2014," says Kristina Clifton, an economist at Commonwealth Bank of Australia

Clifton says she is encouraged by the fact that private sector wages rose during the final quarter of last year even as public sector pay growth declined. Public sector wages have risen faster than those in the moribund private sector for a while now, though a change in that trend would suggest the labour market is strengthening 

Markets care about the wage data because pay growth leads to increased demand within an economy and exerts upward pressure on inflation, with implications for interest rates and financial markets.

Changes in interest rates are normally only made in response to movements in inflation but impact currencies because of the push and pull influence they have on capital flows and their allure for short-term speculators.

Above: AUD/USD rate shown at daily intervals.

The AUD/USD rate was quoted -0.11% lower at 0.7159 Wednesday and is now up just 1.5% for 2019 after chopping back an earlier 2.7% gain last week.

"AUD/USD will most likely continue to trade in a narrow range near the low 0.7000s in the near‑term. It will require a large catalyst, like deteriorating Australian employment conditions, for AUD/USD to sustain a move below 0.7000," says Elias Haddad, a strategist at Commomwealth Bank of Australia. 

The Pound-to-Australian-Dollar rate was -0.08% lower at 1.8205 and has now risen 0.59% for the year-to-date. The Aussie was lower against most G10 currencies early on in the Wednesday session.

Above: Pound-to-Australian-Dollar rate shown at daily intervals.

Wednesday's price action comes at a time when markets are growing ever more optimistic that a deal to end the trade war between the U.S. and China is in the pipeline, given President Donald Trump continues to express confidence a deal can be struck before the March 01 deadline. 

March 01 will see U.S. tariffs on some imports from China more than double to 25% unless the White House extends the negotiating window or a deal is struck before. Trump has said repeatedly now that he could give negotiators an extra 60 days to seal a deal. 

"Trump told reporters US-China talks are “very complex” but are “going very well” reinforcing the idea that even if Lighthizer tells him China has not given enough ground on state subsidies and forced technology transfers, he will overrule his USTR and strike a ‘deal’ all the same," says Elsa Lignos, head of FX strategy at RBC Capital Markets

This comes after Bloomberg News reported Tuesday that Trump is demanding China commit to keeping the Renmimbi stable, as part of any deal to end the tariff fight between the world's two largest economies.

That is positive for the Australian Dollar because it is closely correlated with China's currency. The correlation exists because the Antipodean unit is substantially underwritten by a mammoth bilateral commodity trade with China.

Preventing China from devaluing its currency could neutralise a notable headwind from the Australian Dollar over the long term although during the 12 hours leading into Thursday, jobs and umployment figures for the January month will be the key focus of Antipodean traders.  

"January employment is due tonight. Our economists have pencilled in +20K which is a touch below the current trend level but enough to maintain unemployment steady at 5.0%," says RBC's Lignos. 

The Reserve Bank of Australia said this month that wage growth and inflation are both expected to rise toward more desirable levels over the coming years, but that there are risks to its forecasts for both, stemming mainly from the domestic housing market and global economy. 

Those statements came as part of the same policy update that saw the RBA drop its bias to lift interest rates over the coming years, and begin warning that the next move in borrowing costs could be either up or down and that the risks around the next move are finely balanced. 

Unemployment figures will be key to the RBA's evolving thinking around interest rates during the months ahead so markets will watch Thursday's labour market data closely for signs of further improvement or a deterioration at the beginning of the New Year. 

"The RBA aren’t talking more strongly about cutting rates yet because they still think wages will pick up into a new-normal housing collapse, and because they believe it shows more confidence to do nothing. I repeat: rates down - sooner than you think; and AUD down with it. Nothing doing today though," says Michael Every, a strategist at Rabobank

The RBA's change of guidance sent the Australian Dollar into freefall because the bank had previously said the next move in rates would be up. Since then the market has begun betting even more heavily than it already was that the RBA will cuts its cash rate to a new record low within the next 12 months. 

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