Australian Dollar Lifted by Upbeat Employment Report, but Gains May be Short-Lived Amidst Slow Pace of Wage Increases

- AUD rises as job creation steps up a gear in April, with 22.6k jobs added.

- But higher unemployment rate and weak wage growth keep RBA on hold.

- Bond markets to ensure AUD rise, particularly AUD/USD, is short-lived. 

© Filipe Frazao, Adobe Stock

The Australian Dollar rose across the board Thursday markets responded to the latest Australian employment report, which showed jobs growth continuing apace during April, although it has done little to improve the Aussie interest rate outlook.

Australia's economy added 22,600 new jobs during the April month, up from a small contraction in the number of new jobs created back in March, which was ahead of the market consensus for 19,800 news jobs. This was the highest number of jobs to have been created in any month during 2018 to date and has left employment growth running at 2.7% annually. 

However, on the downside, the Aussie unemployment rate edged higher by 10 basis points to 5.6% as a result of an increase in the so called participation rate. 

"Headline employment was a smidge above expectations at 22.6K, the u/e rate went up to 5.6%, which can be explained by the rise in the participation rate to 65.6%," says Annette Beacher, chief Asia Pacific macro strategist at TD Securities

Markets care about unemployment and jobs growth because they have a direct bearing on wage growth, demand within the economy and consequently, inflation. And it is inflation that central banks are attempting to manipulate when they tinker with interest rates, which are of course the raison d'être for most moves in currency exchange rates.

This is important because after all, changes in interest rates, or hints of them being in the cards, are only made in response to changes in domestic inflation but impact currencies due to the push and pull influence they have on international capital flows and their allure for short-term speculators.

"Full time jobs added was healthy at 32.7k, so a small positive, but the unemployment rate going up and Deputy Gov Debelle stating that this is the BEST indicator of the labour market means RBA will remain on the sidelines for longer. Revisions were a touch negative too," Beacher adds.

Above: Pound-to-Aussie rate shown at daily intervals.

The AUD/USD rate was quoted 0.14% higher at 0.7526 during the morning session Thursday while the Pound-to-Australian-Dollar rate was 0.43% lower at 1.7944. The Australian Dollar was also quoted higher against all other developed world currencies.

Above: AUD/USD rate shown at daily intervals.

"AUDUSD needs to break above the 0.77-figure for bulls to get a firmer foothold. Daily chart seems bullish and there could be a possibility for the pair to head above the 0.76-figure in the near-term. However, as we had noted before, monthly chart is slightly bearish," says Saktiandi Supaat, an FX strategist at Maybank in Singapore.

While April's jobs numbers confirm the Australian labour market is continuing to soak up its spare capacity, the data has done little to alter the outlook for Australian interest rates, which has deteriorated in 2018 and is not expected to augur a change in Reserve Bank of Australia monetary policy until the second half of 2019.

This is because Thursday's data follows closely on the heels of the first-quarter wage numbers, which showed Aussie wages growing slower than was expected and at a still-lacklustre pace during the three months to the end of March.

"Muted wages growth in Q1 was not ideal for the RBA and Australia's federal government if they are to hit their respective targets over the next couple of years. The report reinforced our view that AUD/USD will not enjoy much support from yield spreads into 2019. Shorter term though, the Aussie might benefit from global factors," says David Goodman, global head of strategy at Westpac

Above: Westpac Research graph showing trend in Australian wage growth.

The Reserve Bank of Australia is thought view annual wage growth of 3% or more as the minimum necessary for the central bank to meet its inflation target and therefore, to be able to justify raising interest rates. As a result of this and Wednesday's poorer-than-expected wages report, the Aussie's gains on Thursday may prove to be short-lived.

Australian interest rates have been held at a record low of 1.5% for approaching two years now and, at the time of writing, markets do not expect a change in RBA policy until well into the 2019 year. However, other central banks have long-since begun to raise their interest rates as the global economic recovery from the financial crisis enters its advanced stages.

The Bank of Canada is firmly entrenched in an interest rate hiking cycle while the Bank of England and European Central Bank are also in the process of withdrawing stimulus from their respective economies. 

This has been by-far the greatest source of downward pressure on Aussie this year, which has suffered as the yield differential between Australian and other government bonds has moved to disadvantage the Antipodean currency.

"The negative carry of AU-US could continue to weigh on the AUDUSD especially if subdued wages allow RBA to keep cash target rate at the current level of 1.5%. However, we cannot help but note that the disappointment in wages and jobless rate did not add much downside to the AUD," says Maybank's Supaat.

 

Above: US 10 Year Government Bond Yield.

US treasury yields broke back above 3.1% Thursday, further widening the newly opened gulf between them and those of their Aussie counterparts, which trail behind with a yield of around 2.9%. 

That means investors are further incentivised to sell Aussie Dollars and buy the greenback in order to invest in the American bond market rather than vice versa.

Above: Australian 10 Year Government Bond Yield.

This is the opposite of how the so called carry trade used to work and has been the primary driver behind the Aussie's 4.4% year-to-date fall in value relative to the US Dollar. The only thing that will prevent this from continuing during the months ahead is signs of a change in RBA policy being on the horizon.

However, in the wake of Wednesday's wage report and notwithstanding the Thursday employment report, it now looks as if markets will have few reasons to bet on a regime change at the RBA anytime soon.

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