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- 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.
Australian unemployment rate likely to have declined in February
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.
When will the Australian employment report be released and how could it affect AUD/USD?
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.”
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
Economic Indicator
Australia Unemployment Rate s.a.
The Unemployment Rate, released by the Australian Bureau of Statistics, is the number of unemployed workers divided by the total civilian labor force, expressed as a percentage. If the rate increases, it indicates a lack of expansion within the Australian labor market and a weakness within the Australian economy. A decrease in the figure is seen as bullish for the Australian Dollar (AUD), while an increase is seen as bearish.
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The Australian Bureau of Statistics (ABS) publishes an overview of trends in the Australian labour market, with unemployment rate a closely watched indicator. It is released about 15 days after the month end and throws light on the overall economic conditions, as it is highly correlated to consumer spending and inflation. Despite the lagging nature of the indicator, it affects the Reserve Bank of Australia’s (RBA) interest rate decisions, in turn, moving the Australian dollar. Upbeat figure tends to be AUD positive.
