Australian Dollar Rises On Lower Than Expected Unemployment But Outlook Remains Clouded

Strategist opinions on the fate of the Aussie Dollar in the fourth-quarter and beyond are beginning to diverge.

The Aussie Dollar rose broadly during early trading in London Thursday after data showed the unemployment rate falling faster than was expected in September.

Australian unemployment dropped 10 basis points to 5.5% during the month, according to the Australian Bureau of Statistics report, against economist forecasts for the jobless rate to have held steady at 5.6%.

This places the unemployment rate back at the three year low seen briefly in Spring 2017 and would appear to suggest labour market slack continues to be drawn down down-under.

Australian economic growth has picked up in 2017 and markets have, in recent months, begun to flirt with the idea of a possible interest rate hike from the Reserve Bank of Australia once into 2018.

“We have maintained a 0.76 year-end target for AUD/USD, with further weakness expected in 2018, on the basis that markets were under-pricing the Fed, over-pricing the RBA and not considering risks around softer commodity prices through year end,” says Sean Callow, a foreign exchange strategist at Westpac.

However, while the state of the Australian labour market in September is now clear, there is nothing like agreement on the fate of the Aussie Dollar in the fourth-quarter and beyond.

Callow at Westpac remains sceptical of whether or not the RBA will hike rates next year, while others have recently abandoned any caution over the Australian rate hike narrative.

"The RBA minutes reinforced our recent tactical long AUDCAD trade idea, as the Bank softened its language on currency strength," wrote Mark McCormick, head of North American fx strategy at TD Securities, on Tuesday. "We also think the market is under-pricing risks of an earlier-than-expected RBA rate hike next year, which argues to buy into AUDUSD dips into year end."

Markets had expected that a premature strengthening of the Aussie would deter the RBA from action in 2018 although central bank policymakers were seen softening their attitude toward the idea of a stronger currency their latest monetary policy meeting minutes.

“While these views were looking off market during September’s US$ sell off, the balance of risks appear to have swung in recent weeks with the Dec Fed meeting pretty much fully priced and RBA pricing easing and iron ore lower,” says Westpac’s Callow.

Callow also notes that international capital flows are becoming less conducive to Aussie Dollar strength and that speculative positioning, as highlighted by Chicago Futures Trading Commission data, suggests the market has already bet heavily on a rise in the Australian Dollar.

Such positioning reduces the scope for a further marked increase in speculative bets to drive the Dollar higher. Large net long positions by speculators also heighten the potential downside in the event of adverse news given that such bets might then be unwound.

The Pound-to-Australian-Dollar rate was quoted 0.46% lower at 1.6766 during early trading Thursday while the AUD/USD currency pair was quoted 0.29% higher at 0.7865.