Australian Dollar Snaps Back on Strong Labour Figures

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The Australian Dollar rose and Reserve Bank of Australia (RBA) rate cut expectations retreated following the release of labour market data.

The Pound to Australian Dollar (GBP/AUD) exchange rate is down 0.57% on the day at 1.99 after the ABS said Australian employment rose 35.6k in November, more than the 15.9k in October and above the 25k consensus estimate.

Full-time employment drove the gains by adding 52.6k jobs. The unemployment rate unexpectedly fell to 3.9%, confirming the country's labour market was still in fine fettle.

"Australian employment data for November was, on the face of it, very decent," says Michael Pfister, FX Analyst at Commerzbank. "The Australian dollar benefited from these figures this morning."

"Compared with outcomes before the COVID-19 pandemic, the unemployment and underemployment measures are still low, while trend employment and participation measures are around all-time highs," said the ABS. "This suggests the labour market continues to be relatively tight."

A tight labour market is one in which employers compete for talent and are willing to do so by paying higher wages.

Higher wages drive demand in the economy, which can keep inflation elevated, which will require ongoing vigilance at the RBA.

It is little wonder, therefore, that investors lost some confidence in the belief that the RBA would cut early in 2025. A first full rate cut is now only seen in April next year.

The retreat in rate cut expectations helped Australian bond yields rise and the AUD/USD rebounded from recent lows just below 0.64 to 0.6420.

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It's been a tumultuous week for the Aussie Dollar, which came under pressure after the RBA's policy decision on Tuesday. Bets on an earlier start to the rate-cutting cycle rose after the RBA indicated it had shifted assumptions in favour of considering a rate cut.

This pivot away from a more defensive, data-lead approach follows last week's disappointing Australian GDP report, which suggested the economy was starting to slow.

However, Thursday's labour market figures counter the view of a deteriorating economy and confirm that any RBA easing cycle would need to be cautious.

If this is the case, then the RBA will cut less than some of its global peers, which can offer AUD a line of support in 2025. 

This will be particularly relevant if a China-U.S. trade war occurs, which would pose headwinds to Australia's main trading partner.

Despite the better-than-anticipated labour market figures, Commerzbank's Pfister thinks it is no game changer for the RBA and the AUD outlook.

"Although the unemployment rate fell, this was mainly due to a (slight) decline in the participation rate. At the same time, the number of jobs rose, but the number of hours worked was virtually unchanged. This means that although more people were hired, overall people did not work more hours last month. We therefore remain comfortable with our forecast of a first interest rate cut by the Reserve Bank of Australia in February," says Pfister.

If this is correct, another swing in market expectations awaits, which would weigh on the Australian Dollar and send it to recent lows, or even below.