Australian Dollar Recovery Forecast to Continue Despite Jobs Setback in May

- AUD knocked by jobs data, ensuring correction continues.
- After AU sheds more jobs in May and unemployment lifts.
- But AUD recovery trend intact, 0.6750-0.6950 range seen.

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Australia's Dollar was dealt an additional setback Thursday when official statistics revealed a further deterioration in the jobs market for the month of May, although the data has merely dented sentiment and is seen as unlikely to derail the antipodean currency's recovery. 

The Australian Dollar was on its back foot after the economy was revealed to have shed more jobs than anticipated in May, with employment falling by -227.7k when markets had looked for a decline of only -105k.

That lifted the unemployment rate from an upwardly-revised 6.4% to 7.1%, above the consensus for an increase to only 6.9%, but an increase that would have been stronger still if not for a decline in the participation rate that artificially suppressed the jobless number. 

Many statistical offices including the Australian Bureau of Statistics (ABS) do not consider an individual to be unemployed unless they are both out of work as well as actively looking for work. Many Australians will not have met that definition given they remained under 'lockdown' for half the month. 

Above: AUD/USD rate shown at hourly intervals alongside S&P 500 index futures (black line).

"Some workers who lost their jobs in April will have been classified employed in April but will not have been classified employed in May.  That is why we expected a fall in jobs of 100k that was larger than the consensus looking for ~80k.  It is also why we flagged that the risk was an even larger fall than the 100k we pencilled in.  As it turns out that risk materialised," says Gareth Aird, an economist at Commonwealth Bank of Australia. 

Aird and the Commonwealth team say the bulk of job losses will have already taken place in May and that employment should begin to grow again from June but that this won't be reflected in the unemployment rate until some months after. They say participation will continue to rise and should lift the unemployment rate to 8.5% over the course of summer, potentially creating the appearance of a labour market still in distress. 

"This might not move the needle much for the RBA, but it will be notable to hear from Governor Lowe on whether he still sees the economy tracking on the less gloomy side of projections. Overall, the A$ domestic story remains supportive, with states loosening restrictions despite an uptick of Covid-19 cases in Victoria and the trade balance firmly in surplus. We have raised our end-Sep forecast to 0.70, but near term the risks are sideways to lower, with US “second wave” headlines likely to continue and geopolitics chipping away," says Sean Callow, a Sydney-based strategist at Westpac. 

Australia's Dollar went into retreat overnight and was still soft early in the European session Thursday in response to the data, after already having come off the boil earlier in June when stock markets topped out and the U.S. Dollar bottomed. AUD/USD has moved in near lockstep with the S&P 500 for months and in the opposite direction to the Dollar Index that turned higher last week when the Federal Reserve underwhelmed investors with its June policy update. 

Above: AUD/USD rate shown at daily intervals alongside S&P 500 index futures (black line).

"The US dollar hit a multi-month low last week on the initial FOMC headlines which included a gloomy forecast for the US economy. Since then the dollar has traded a little firmer, albeit without looking as though it is ready to stage a notable recovery," Callow says. "A medium-term dollar bear trend continues to take shape. Fed messaging underscores a deep commitment to ongoing super-accommodative policy. Further stimulus is still in the pipeline."

Callow and the Westpac team look for the Aussie Dollar to trade within a narrow 0.6750-to-0.6930 range against the greenback over the coming weeks but forecast a recovery to 0.70 by the end of September and 0.72 by year-end, both forecasts that were upgraded this week from 0.66 and 0.68 respectively. 

This upward bias is AUD/USD is forecast to keep the Pound-to-Australian Dollar rate under pressure, leading it to new 2020 lows of 1.7857 by September and 1.7543 in time for year-end, but Westpac's guidance on immediate trading ranges for AUD/USD and GBP/USD implies a short-term range of between 1.7985 and 1.8962, suggesting the downside for Sterling from Thursday's 1.8230 level is limited at worst.

"With policy rates anchored everywhere, the focus has shifted to the debasing impact of QE policies on FX. The AUD is a relative winner with the slowest pace of central bank balance sheet growth in the G10 space and signs of portfolio flows returning to government debt," says David Bloom, head of FX research at HSBC. "We expect the AUD to throttle back and gains to proceed at a steadier pace. We recently changed our AUD-USD forecast to 0.70 by year-end."

Above: Pound-to-Australian Dollar rate shown at daily intervals with 200-day moving average.