Australian Dollar on Offer as Technicals, Employment Data Weigh

AUD remains vulnerable to further falls says one technical strategist, while Thursday’s labour market data provides little scope for fundamentals to offset that weakness.

Latest labour market figures have done little to suggest interest rate rises at the Reserve Bank of Australia are likely sooner rather than later - something the Australian Dollar needs if it is to return to winning ways once more.

Australian unemployment fell 10 basis points to 5.4% in October, its lowest level since February 2013, when it had been expected to sit static at 5.5%.

Coming against a backdrop of slower jobs growth, the unemployment rate took markets by surprise and delivered a temporary boost to the Aussie Dollar. But, hanging over the labour market figures are the previous day's job numbers which confirm falling unemployment is having little upside impact on wages.

The wage data released on November 15 was described by one analyst as a 'gamechanger', and clearly markets wanted to see a bigger fall in unemployment to suggest wages might rise in the future and thus justify buying the Aussie.

“Due to a lack of acceleration in wages growth, this employment report doesn't move the needle for the RBA’s neutral stance, and is neutral for the markets,” says Richard Kelly, head of global strategy at TD Securities.

When a central bank raises interest rates it pushes up the yield - or return - offered by bonds which in turn attracts foreign money, thereby bidding up the value of that currency. If interest rate rises are expected sooner than had been previously been assumed, investors duly enter the market in anticipation.

The problem for the Australian Dollar is that there is little suggestion the RBA is in a rush to raise interest rates as the falling unemployment rate is not yet impacting on wages, and therefore on inflation.

Above: Pound-to-Australian-Dollar rate shown at hourly intervals.

“The Phillips curve tells us that wages growth should follow, in turn boosting core CPI. So far this year that pass-through is feeble at best,” Kelly adds. “The next wages report isn’t released until 21 February, adding to RBA patience in the first few months of 2018.”

Australian wage growth came in at 0.5% during the third-quarter, according to Australian Bureau of Statistics data released Wednesday, unchanged from the previous quarter but below the 0.7% growth expected by economists and foreign exchange markets.

Third-quarter wages were weaker than forecast despite a sharp rise in the minimum wage having been pushed through during the survey period, suggesting to analysts that the disappointing data may actually be quite flattering to undelrying wage pressures.

"We think these weak wages data substantially change the AUD’s narrative," says David Forrester, an economist with Crédit Agricole, in a note after the wage data was released. "Despite falls in both the unemployment and underemployment rates, wages growth is not picking up."

Above: Pound-to-Australian-Dollar rate shown at weekly intervals.

Traders had hoped, earlier in 2017, the Reserve Bank of Australia might follow other major central banks and begin raising interest rates around the turn of the year. However, persistently weak inflation and an absence of wage growth have steadily scuppered these hopes during recent months.

“Overnight Index Swaps at present is only 14% priced for a rate hike in May 2018, but after soft retail sales, underwhelming core CPI and barely rising wages growth, it is difficult to argue with pricing just now,” says TD’s Kelly, Thursday.

The Reserve Bank of Australia held the cash rate at a record low of 1.5% for 15 months in a row at its November meeting. “Our base case remains for +25bp in May 2018 unless wages and/or CPI materially surprise to the upside (or downside!),” says Kelly.

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Technicals Confirm Path of Least Resistance is Lower

Meanwhile, technical strategists - those traders that move currencies according to their interpretation of the market's structure - see the Aussie Dollar as being prone to further declines.

“AUD/USD remains immediately offered below the 200 day moving average and downtrend at .7687/98,” says Karen Jones, a technical strategist at Commerzbank. “We are looking for a slide to the 2016-2017 uptrend line at .7479.”

Above: AUD/USD rate shown at hourly intervals. 

Rate-setters have been clear that future hikes are contingent on wage pressures being sufficient to return inflation to target and to enable debt-laden Australian households to whether higher borrowing costs.

"The recent intermediate high on 2nd November, and 23.6% retracement, at .7729/31 will need to be overcome to alleviate immediate downside pressure," says Jones. 

The AUD/USD rate was quoted 0.06% lower at 0.7587 around noon in London Thursday. Meanwhile, the Pound-to-Australian-Dollar rate was marked 0.20% higher at 1.7385.

Above: AUS/USD rate shown at weekly intervals.

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