The Australian Dollar Tops G10 after Jobs Data Puts RBA on Hold

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- AUD aided by jobs numbers as full-time workers grow.

- Market bets on third RBA rate cut by year-end ease further.

- But local analyst still look for cash rate to hit 0.75% in 2019.

- ING eyes possible AUD weakness on fresh China concerns.

The Australian Dollar rose to the top spot in the G10 league table Thursday after jobs data for June was seen fostering a shift from part-time to full-time work within the labour market, leading analysts to question whether a third Reserve Bank of Australia (RBA) interest rate cut will really be delivered in November. 

Australia's economy created only a paltry 500 new jobs overall in June although the headline number masked the fact that there was a significant fall in the number of part-time workers during the month and a notable increase in those employed on a full-time basis. Unemployment remained at 5.2% last month.

Part-time employment fell by 20,600 people on a seasonally adjusted basis in June while the number of full-time workers rose by 21,600, which is positive for 'capacity utilisation' in the labour market as well as the wage and inflation pressures the Reserve Bank of Australia is coveting. 

"Wage pressure is something the RBA is hoping for, as inflation has been considerably below its target during the first half of the year. However, the RBA has already cut its key rate two times in a row, in May and in June. It can therefore afford to take a breather and observe any future labour-market and trade-conflict developments for the time being, even though the June report could have been a bit better," says Antje Praefcke, an analyst at Commerzbank. 

The RBA has cut its interest rate to a new record low on two occasions this year, citing below-target inflation pressures and an outlook for the economy that leaves an increase in the consumer price index to levels within the 2%-to-3% target band looking like a long shot. 

'Spare capacity' in the jobs market is cited as one of the most important factors behind low levels of Aussie wage growth, which are believed to be the main driver behind the muted inflation pressures. The cash rate is just 1% currently. 

Governor Philip Lowe said this month the bank will now "monitor developments in the labour market closely and adjust monetary policy if needed. But financial markets are still betting the RBA will cut its cash rate to 0.75% before the year is out, although some say those bets eased on Thursday. 

Above: Australian Dollar Vs G10 rivals Thursday. Source: Pound Sterling Live. 

"The Aussie has derived some near-term support from the paring back of expectations for another imminent RBA rate cut. The RBA has signalled that they are not in a rush to quickly follow up the back to back rate cuts delivered in June and July. The release overnight of the latest Australian employment report has supported those expectations," says Lee Hardman at MUFG. 

Pricing in the overnight-index-swap market implied on Thursday, a December 03 cash rate of 0.77%, which is slightly above the 0.75% that markets have been betting the rate will fall to before year-end.

MUFG and Commerzbank analysts say the RBA might want to remain in 'wait and see' mode for a while yet before cutting rates again, partly because of Thursday's data, but local analysts are saying there was little in the jobs report that'll change the RBA outlook. 

Furthermore, Job vacancies fell by 1.1% in seasonally adjusted terms during the quarter to the end of May, the Australian Bureau of Statistics reported last week, which means advertisements rose by only 1.8% during the 12 months to the end of May. Economists are concerned about what that data means for the outlook.

"Overall, there was nothing in the data to increase the probability of an August rate cut.  Equally there was nothing to suggest that the RBA won’t ease the cash rate by the end of the year.  CBA Economics continues to expect the RBA to cut the cash rate by another 25bps in November," says Kim Mundy at Commonwealth Bank of Australia. 

Above: Pound-to-Australian-Dollar rate shown at daily intervals.

Changes in interest rates are normally only made in response to movements in inflation but impact currencies because of the push and pull influence they have over capital flows, and their allure for short-term speculators.

Capital flows tend to move in the direction of the most advantageous or improving returns, with a threat of lower rates normally seeing investors driven out of and deterred away from a currency. Rising rates have the opposite effect.

The Australian Dollar has stabilised in recent months because financial markets have 'priced-in' all of the rate cuts the RBA is seen as likely to deliver. However, it fell steeply in the year leading up to the beginning of May as the market eyed the prospect of Aussie bond yields falling and losing their appeal to investors.

"Given unclear indications from the jobs market we suspect that the RBA may extend its current wait-and-see attitude for the next few months. This should leave AUD mainly driven by external factors, with the fear of rising trade tensions possibly triggering a downside correction in AUD/USD, which may test the 0.7018 100-day moving average support," says Chris Turner, head of FX strategy at ING Group. 

Above: AUD/USD rate shown at daily intervals.

With the RBA outlook now more clear-cut as far as the market is concerned, the Australian Dollar is seen taking its cues from what the Federal Reserve (Fed) does over in the U.S. and from developments in the trade war between the world's two largest economies. 

The Fed is widely expected to cut its own rate on as many as three occasions by year-end, aiding the AUD/USD rate higher, although a lack of progress in talks between the U.S. and China is casting a cloud over that outlook. 

Presidents Donald Trump and Xi Jinping agreed at the end of June to return to the negotiating table and to avoid imposing new tariffs on each other while talks are ongoing, enabling the global economy to breathe a sigh of relief.

However, commitments said to have been made by both leaders at the G20 summit are not being implemented, which is stoking fears among analysts of a return to hostilities between the two that could ultimately see the U.S. impose tariffs on the rest of American imports from China. 

"The temporary trade truce agreed at the G20 summit late last month could prove to be even shorter than feared. President Trump has complained recently that China wasn’t purchasing the large volumes of US agricultural goods that he claims President Xi promised. On the other hand, there has reportedly been no improvement in how the US treats Huawei Technologies which was a key demand of China," says MUFG's Hardman. 

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