Underwhelming Labor Market Print Hits AUD

Underwhelming Labor Market Print Hits AUD

 Published: January 24th, 2024

The Aussie’s position as the worst-performing G10 major was re-confirmed this week after release of under-consensus labour market figures.

AUD softened after the Australian Bureau of Statistics (ABS) said the country lost more than 65,000 jobs in December 2023, chilling a market that was looking for around 17,000 jobs to be created.

Gains for the Sterling to Australian Dollar rate reached a new multi-month high of 1.93 shortly after the economic print was released. The AUD/USD rate fell to 0.6524, before bouncing back to its previous level.

An analyst note from Commonwealth Bank of Australia said AUD/USD had fallen briefly to 0.6520 just ahead of publication of the Australian labour force survey. The ABS release counted the number of people in full-time employment down by more than 106,000. Economists at Westpac noted in a separate analysis that the drop represented the biggest one-month fall on record, not counting the ructions that occurred under COVID-19.

Australia’s labour participation rate sunk to 66.7 per cent in December, which was notably less than the 67.2 per cent economists were looking for. The overall unemployment remained stable at 3.9 per cent.

The ABS figures can be partly explained by seasonal shifts, a pattern that has featured before in Australian labour market data. Westpac says that reality should mitigate any significant downside risks for AUD.

'Both the robust employment figures seen in October and November, and the fall registered in December, are consistent with seasonal patterns in employment growth we've seen in previous years,’ said the ABS.

'What it reflects is the hiring of extra staff by businesses in October and November, rather than waiting until December,’ Commonwealth Bank of Australia.

When rate hike anticipation cools

The Australian Dollar (AUD) was weaker against G10 peers at mid-year 2023, as expectations for a RBA rate hike retreated following publication of minutes from the central bank’s June policy meeting

The RBA raised the cash rate a further 25 basis points in late June 2023 and brought a previously announced break from hiking to a close. Minutes from the bank’s policy committee meeting, however, revealed that it was a more nuanced decision than previously expected.

‘AUD/USD fell close to 0.8 per cent to 0.6810 because of dropping commodity prices and a set of dovish signals from the Reserve Bank of Australia’s early June meeting,’ said an analyst note from Commonwealth Bank of Australia’s forex strategy unit. ‘The GBPAUD exchange rate got a similar lift, rising to 1.8793 after the minutes were released.’

Another analysis from ANZ said investors were not interpreting the RBA's June board meeting minutes as especially hawkish.

‘The argument for lifting the cash rate another 25 basis points centered on the heightened risk that inflation might take longer than had been expected to settle down to target’.

The RBA’s board noted that ‘inflation is already expected to stay north of target for a number of years, meaning Australia will need somewhat longer to return to target than some other countries.’

The decision to raise interest rates came as a surprise to forex traders expecting the central bank to stay on pause and the Australian Dollar rallied on the news of the 25bp hike. The Australian Dollar’s rise brought a period of underperformance to a close.

ANZ noted that it also confirmed that the foreign exchange market is still very focused on the evolution of interest rates.

Stability before gains

In late February 2023, the Aussie was holding firm as the best-performing G10 major for the year-to-date, despite gains by many of its peer currencies for a second successive session.

On Tuesday, 20th February, GBP/AUD reversed all of the previous week's losses and neared a 200-day moving average of 1.7544. Analysts at the Commonwealth Bank of Australia (CBA) said the pair could potentially reach as high as 1.7789 if the Reserve Bank of Australia (RBA) said that the next expected hike to the cash rate would be the last in the current cycle, which they did.

‘AUD/GBP might test downside support at 0.5619 by mid-week if traders wind back their expectations for additional tightening,’ wrote Commonwealth Bank of Australia’s forex strategy unit in a Monday analyst note.

‘We believe AUD/GBP is trading near fair value and we’re looking for the pair to hover around the current level for most of this year.’

Investors were looking for the RBA to post its ninth increase to the cash rate since April 2022, with an uptick to the benchmark of 25 basis points, or 3.35 per cent before the next anticipated rate hike in March.

The consensus forecast pointed to a central bank ready to raise the rate again in March, with some prospect of another 25-basis point rise, bringing the cash rate to 3.6 per cent.

"The indicators we’ve seen in Australian domestic economic data over the past 30 days or so have been up and down. Labour figures for December 2022 disappointed as employment fell, surprising most analysts,’ said CBA in its analyst note.

‘A surprisingly strong print for fourth-quarter CPI inflation, paired with a plunge in December retail sales suggests the current cost-of-living crisis in Australia is deeply embedded.’

Seasonality is a familiar factor

In early March 2022, AUD was up against the Euro, Dollar, and British Pound as forex traders reacted to signals that an interest rate by the Reserve Bank of Australia may be in the offing.

Minutes from the RBA's February policy meeting suggested interest rates could rise as quickly as April far earlier than the central bank had been signaling since the start of the year.

In fact, it was just in February 2022 that RBA Governor Phil Lowe told The South China Morning Post that the bank was ‘being patient’ on interest rates ‘in a way that markets with much higher rates of inflation simply can’t.’

After that, inflation Down Under started steadily rising and the RBA was clearly spooked. The bank’s February minutes said yearly core inflation in the first quarter of 2022 would likely exceed its top target of two to three per cent.

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