Battered aussie looks to wage growth and jobs numbers – Forex News Preview


Marios Hadjikyriacos, XM Investment Research Desk

After taking a beating from an escalation in US-China trade tensions, the Australian dollar will now look to the nation’s wage growth data for Q1, due at 00:30 GMT on Wednesday. The all-important employment stats for April will follow on Thursday at 01:30 GMT; they may prove crucial in determining whether the RBA will cut rates soon.

The Reserve Bank of Australia (RBA) held off from cutting interest rates the last time it met, but kept that option very much on the table, signaling it ‘will be paying close attention to developments in the labour market’. The Australian economy has stalled lately, with growth and inflation losing steam, leading the central bank to turn its eyes back to the easing button to support the economy.

The labour market is critical in this dynamic. Reducing interest rates boosts employment by making it easier for firms to employ people, which over time helps lift wage growth and gives consumers more income to buy things with. The resulting increase in demand raises prices, and hence inflation. This puts even more emphasis on the upcoming data to determine whether – and how soon – the RBA will cut rates.

Wages are forecast to have risen by 2.3% in Q1 on a yearly basis, the same pace as previously. Meanwhile, the unemployment rate is expected to have ticked up to 5.1% in April as the net change in employment is expected to have declined from previously, but to have remained in positive territory. Overall, such prints would hardly be reassuring for RBA officials, and if met, could strengthen the case for a near-term rate cut – hurting the aussie.

Note that China will also release economic data early on Wednesday, which may affect the aussie too.

Looking at market pricing, investors seem to think it’s a matter of when, not if, the RBA will cut. While the implied probability for a cut is only 33% for the next meeting in June, that action is more than fully priced in by August, while another one after that is nearly factored in by December. The bottom line is that markets have already priced in a lot of easing by the RBA, implying that further downside in the aussie when the Bank actually acts may not be massive.

What could trigger substantial weakness in the currency, is more escalation in the US-China trade conflict. The situation may get worse before it gets better, with the summer months likely to be marked by threats for more tariffs by the US to squeeze concessions from China. Trump is probably bluffing on that one, meaning he is unlikely to actually impose more duties, as that would really impact US consumers (and thus his approval rating). Still, he will surely threaten as much, which implies that more risk aversion – and hence more pain for the aussie – may be in store.

Technically, further declines in aussie/dollar could find support near the 0.6900 handle, with a bearish break opening the door for a test of 0.6825, the 2016 low.

On the flipside, a rebound may stall initially around the psychological 0.7000 mark, with even steeper advances aiming for 0.7070.