Australian Dollar Stronger but Can That Labour Market Data be Trusted?

The Aus dollar outperformed the British pound over the past 48 hours thanks to data showing more jobs were created in Australia than many economists were expecting, but lingering concerns over the labour market data's accuracy remain.

The Australian dollar was sent higher across the board on news that 58.6K jobs were created in Australia in October.

The Australian Bureau of Statistics confirmed that the unemployment rate remained at 6.1% but monthly hours worked in all jobs increased by 5.7 million hours confirming jobs and productivity are marching higher in lock-step.

This was clearly a massive surprise to a pessimistic market that was only expecting an additional 15K jobs. The message being given by the data is that the economy may not be as poor as reflected by the lower Aussie dollar and an upside correction is therefore required.

The pound to Australian dollar exchange rate (GBPAUD) broke lower by over a percent to reach 2.1290, the conversion could well test its November lows over coming days.

The October low at the 2.08 support line does lie beyond here and is the next target.

The Aussie is meanwhile up by a similar margin against the US dollar at 0.7142 and is at 1.5041 against the euro.

Note these quotes are spot market quotes, if you are looking to make an international payment your rate will be subject to a discretionary spread at your bank. An independent FX provider will however get you closer to the market, in some instances this can deliver up to 5% more FX.

Credibility Gap?

The labour market surprise reminds us of the opening days of 2015 when we had similar shocks from this data series.

Many questioned the accuracy of the methodological changes that were introduced in 2014 as the economy grew more jobs in the face of the slowdown in the mining sector.

This latest figure instead confirms the market is prone to under-estimating just how robust the Australian economy is.  

Jeremy Stretch at CIBC in London thinks the data should be viewed with caution:

"While the monthly advance was the most aggressive since March ’12 it is also notable that we have only seen three stronger employment reports going all the way back to 2000. Thus in the light of such information and recent labour market volatility it is easy to suggest something of a data credibility gap."

Reserve Bank of Australia to Keep Rates Steady

Why would the Australian dollar benefit from these figures?

The answer lies with the observation that Australian interest rates will likely stay around current levels for some time yet.

Global money flows to where yield is higher - an advantage Australian still maintains - and as long as Aussie rates stay at present levels that flow will likely continue.

“The RBA and the Government will welcome these figures. The data provides further support for NAB’s contention that strengthening in the non-mining sectors of the economy is more than offsetting the drag from weakness in mining and the end of the mining construction boom,” says Ivan Colhoun at NAB in Sydney.

The RBA appears to be coming to that same conclusion as evidenced in its recent November Statement of Monetary Policy.

NAB remains of the view that Australian cash rates will remain on hold at 2% for an extended period.

However, CIBC's Jeremy Stretch reckons any Aussie dollar strength will be most unwelcome at the RBA, and this alone could prompt a rate cut:

"However, we would still argue that the RBA would like to ease monetary conditions, via the AUD. Thus, we would be unsurprised should the RBA be secretly hoping the December Fed meeting will not prove to be another false dawn.

"The AUD USD bounce failed to take out a recent double top at 0.7170, indeed as we remain below 0.7180/90 we maintain a broad downside bias."