With unemployment spiking and broader measures of labour market slack increasing, the risk of strong wages growth sparking renewed inflationary pressures looks to have past.
By :David Scutt, Market Analyst
- Australia is struggling to absorb new entrants to the workforce, seeing unemployment lift
- Broader measures of labour market slack are rising, lessening the risk of continued strength in wages growth
- The risk of further RBA rate hikes has diminished greatly this week
- AUD/USD remains a buy-on-dips prospect, but AUD/JPY looks vulnerable to downside
Australia struggling to absorb new job entrants
Australian unemployment spiked unexpectedly in April, adding to evidence that the labour market is cooling quickly.
Australia’s Bureau of Statistics (ABS) said unemployment jumped to 4.1% from an upwardly revised 3.9% in March. Employment rose by 38,500, above the 23,700 pace expected, although the breakdown revealed full-time employment went backwards, declining by 6,100.
Explaining the jump in unemployment, labour force participation rose a tenth of percent to 66.7%. Economists were looking for it to remain at 66.6%. With the labour force growing faster than employment, the total number of unemployed Australians increased by 30,300.
Labour market slack increasing, lessening wage spiral risks
Like the unemployment rate, broader measures of labour market slack increased, pointing to the likelihood of further moderation in wage pressures as seen in Wednesday’s wage price index. The proportion of underemployed Australians in the workforce rose by a tenth of a percent to 6.6%. Labour market underutilisation – which combines unemployed and underemployed workers together – rose by a larger 0.4 percentage points to 10.7%.
Source; ABS
RBA rate hike threat passes
At 4.1%, Australia’s unemployment rate is already above the RBA’s June forecast of 4% issued earlier this month. Given that was formulated using an expectation the cash rate would be left unchanged throughout the next year, the surprise lift in joblessness creates immediate downside risks to the rates profile.
Source: RBA
With wages growth and unemployment more important to the Reserve Bank of Australia than employment growth, Australia government bonds rallied with rate sensitive 3-year yields falling as much as seven basis points.
With the risk of further rate hikes from the RBA all but extinguished, the Australian dollar softened, giving back solid gains seen earlier in the session. However, it’s predominantly offshore factors that are driving AUD/USD and AUD crosses right now, meaning incoming data abroad is where focus should be concentrated.
AUD/USD outlook
Despite the modest pullback on the jobs report, AUD/USD remains a buy-on-dips prospect. Momentum is to the upside, and it remains in an uptrend.
Having broken resistance at .6642 on Wednesday, that will likely revert to support near-term, allowing for traders to buy dips towards it with a stop loss order below for protection. .6730 would be the first potential upside target, with .6870 and .6893 the next after that.
AUD/JPY outlook
AUD/JPY provides a different setup for traders with rapid strengthening in the yen combining with a modest pullback in the Aussie to generate a possible evening star pattern on the daily chart. While that implies the risk of renewed downside, I’d like to see the uptrend the pair has been stuck in since the middle of April give way before considering going short.
If the price were to pierce and hold below this level, shorts could be initiated with a stop loss order above for protection. 100.60 looms as a potential trade target.
– Written by David Scutt
Follow David on Twitter @scutty
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