Australian dollar hit by disappointing unemployment numbers as August RBA rate cut becomes more likely

The Australian dollar (Currency:AUD) has relinquished earlier gains - it would seem that the continued positive sentiment on global FX markets has failed to distract from today's poor unemployment data. A look at the spot market exchange rates shows:

• The pound to Australian dollar is 0.21 pct higher at 1.6407.
• The euro to Australian dollar is 0.14 pct higher at 1.4173.
• The Australian dollar to US dollar is 0.37 pct higher at 0.9207.
• The Australian dollar versus New Zealand dollar is 0.05 pct lower at 1.1702.

NB: The above are spot market quotes to which your bank will affix a discretionary spread. However, an independent FX provider will guarantee to deliver between 2% and 5% more currency by beating your bank's spread. Please learn more.  

Australian employment produced a decent upside surprise, rising 10.3k, versus consensus for a flat print.

"However, the unemployment rate moved higher from 5.5% to 5.7%, which likely provides the RBA with greater scope to ease policy if needed. We remain bearish on the AUD’s medium-term prospects," warn Barclays in a morning foreign exchange note on the matter

Justin Fabo at ANZ Research says today’s labour force report for June was again soft:

"The unemployment rate rose to 5.7%, the highest since August 2009 and a little higher than the 5.6% expected by us and the market. While employment rose by around 10K m/m against expectations for an unchanged outcome, trend employment growth of +7.5K currently is only around half that required to prevent the unemployment rate from rising (assuming an unchanged participation rate). The
participation rate rose modestly in June to 65.3%. Revisions were minor to prior months’ outturns."

According to Fabao the increase in the unemployment rate to 5.7% in June looks a little overdone relative to the trend in ANZ job ads.

The unemployment rate jumped almost 0.2ppts to 5.73% in June.

"While the jobless rate may now pause at around the 5.7% mark in the near term, we have nevertheless been expecting it to rise to around 5¾% in Q3; this has also been foreshadowed by the level of spare capacity in the economy as indicated by the NAB business survey," says Fabao.

Moreover, the weakness in job ads measures continues to suggest that employment growth will remain soft in the near term and weaker than growth in the adult population.

Chances of an August rate cut have risen

So how does unemployment impact the Australian dollar? Via interest rates at the Reserve Bank of Australia.

ANZ Research have informed clients that the chance of a rate cut in August have risen:

"Market pricing for the chances of an RBA rate cut in August was unchanged at around 60% following the labour force release. The trend higher in the unemployment rate has been what we and the RBA have been expecting. While today’s data in isolation were not the ‘smoking gun’ that would definitely push the RBA into cutting rates in August, the recent run of monthly activity indicators – job ads, retail sales, business conditions and today’s figures – have been relatively weak, and we expect Q2 core inflation to print at a low 0.4–0.5% q/q later this month. Hence, the chances of an August rate cut have certainly risen.

"A key question for the RBA is whether it waits a little longer to see if the lower AUD, and already low rates, provide some support to the economy.

"But our view is that the AUD is largely acting as a ‘shock absorber’ rather than providing a boost to growth per se. In addition, the timing of the federal election complicates things with the Bank wanting to steer well clear of the election if it indeed gauges that rates need to move lower."