- The Australian Unemployment Rate is expected to have eased to 4% in February.
- Employment Change is foreseen to bounce after January’s disappointing 0.5K increase.
- AUD/USD turned marginally bullish near-term following the Federal Reserve’s decision.
Australia is scheduled to release the February monthly employment report on Thursday, following the Reserve Bank of Australia (RBA) monetary policy decision on Tuesday. The Australian Bureau of Statistics (ABS) is expected to announce that the economy added 40K new job positions in February, while the seasonally adjusted Unemployment Rate is foreseen at 4%, easing from 4.1% in January. The Australian Dollar (AUD) heads into the event with a weak tone, trading against the US Dollar at around 0.6570.
Australian Employment Change is divided into full-time and part-time positions. Full-time jobs imply working 38 hours per week or more and usually include additional benefits, but they mostly represent consistent income. On the other hand, part-time employment generally means higher hourly rates but lacks consistency and benefits. That’s why the economy prefers full-time jobs.
In January, the economy shed 10,600 part-time roles and added 11,100 full-time, leaving a measly headline net gain of around 500 jobs for the month.
Meanwhile, the Reserve Bank of Australia (RBA) announced its monetary policy decision on Tuesday. As widely anticipated, the RBA kept the Cash Rate at 4.75% for the third consecutive meeting. Policymakers acknowledged inflation is moderating but added the economic outlook remains uncertain. The decision fell short of impressive and came out alongside the Bank of Japan’s (BoJ) decision to drop its ultra-loose monetary policy, hiking rates for the first time in seventeen years. As a result, the US Dollar soared across the board, pushing AUD/USD to a two-week low of 0.6503.
As said, the Unemployment Rate is foreseen at 4% in February, easing from the previous 4.1%, although still higher than the 2023 low of 3.5%. RBA Governor Michele Bullock noted in the press conference following the monetary policy announcement that “The judgement at the moment is the labour market still is slightly on the tight side,” based on the fact that the Unemployment Rate is still lower than it was before the Coronovirus pandemic. Back then, the Unemployment Rate averaged 5% for nearly a decade.
It is worth remembering that the RBA mandate is “to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people,” according to the central bank’s own definition. Hence, a bounce in employment stands in the way of rate cuts.
The Australian economy has cooled more than enough with recent interest-rate hikes, and a recession is not out of the picture. In fact, economists believe the November hike accelerated the slowdown and may have been excessive. If unemployment continues to rise, the RBA would be forced into early rate cuts.
That said, a lower-than-anticipated Unemployment Rate will allow Australian policymakers to maintain rates higher for longer, which, conversely, will mean higher risks for an economic setback.
Wage growth in the country is reported separately. The Australian ABS releases the Wage Price Index quarterly, which “measures changes in the price of labour, unaffected by compositional shifts in the labour force, hours worked or employee characteristics.”
The latest report shows that the Wage Price Index rose 0.9% for the three months to December and 4.2% over the year. That was the first time in three years that wage growth outstripped inflation and the highest annual increase since early 2009. Wage increases pose a risk to inflation.
The RBA is on a narrow path, as former Governor Philip Lowe used to say, and may be forced into quick, unexpected monetary decisions in the months to come. A higher-than-anticipated Unemployment Rate may not bother Australian policymakers, but it could indeed take its toll on the Aussie.
The ABS will publish the February employment report on Thursday at 00:30 GMT. As previously stated, Australia is expected to have created 40K new jobs in the month, while the Unemployment Rate is foreseen at 4%. The Participation Rate is foreseen unchanged at 66.8%.
Ahead of the release of Australian employment figures, the United States (US) Federal Reserve (Fed) announced that it left the benchmark rate unchanged at 5.25%-5.5%, as widely anticipated. As a result, the US Dollar entered a selling spiral that pushed AUD/USD higher.
The Fed also unveiled the Summary of Economic Projections (SEP) or dot plot, which showed that policymakers still aim to cut rates three times this year, more than the suspected two. Additionally, the central bank upwardly revised its growth and inflation forecast, while unemployment is foreseen to ease. Chairman Jerome Powell held a press conference and hinted that the central bank is in no rush to cut rates. The economy is growing, inflation is still high, and the labour market is tight.
From a technical perspective, Valeria Bednarik, Chief Analyst at FXStreet, notes: “The AUD/USD pair trimmed its weekly losses and moved further away from the 2024 low at 0.6442. Still, as seen in the weekly chart, the wider perspective indicates that the pair has room to break lower and test buyers’ determination at around 0.6400, particularly if the Aussie pair turns south with employment figures.”
Bednarik adds: “On a daily basis, AUD/USD is turning bullish. The pair develops between directionless moving averages, while the Relative Strength Index (RSI) indicator turns marginally higher but remains at negative levels. The Momentum indicator lacks directional strength, advancing modestly just above the 100 level, in line with recent price action, but still not enough to confirm a bullish continuation.”
Finally, she notes: “The pair has retreated sharply after reaching the 50% Fibonacci retracement of the 0.6871-0.6442 slide at 0.6656 but has recovered above the 23.6% retracement of the aforementioned slide at 0.6543. The pair can now extend its advance towards the 0.6600-0.6610 area, while once above the latter, the pair could reach the mentioned Fibonacci retracement at 0.6656.”
Economic Indicator
Australia Employment Change s.a.
The Employment Change released by the Australian Bureau of Statistics is a measure of the change in the number of employed people in Australia. The statistic is adjusted to remove the influence of seasonal trends. Generally speaking, a rise in Employment Change has positive implications for consumer spending, stimulates economic growth, and is bullish for the Australian Dollar (AUD). A low reading, on the other hand, is seen as bearish.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
