Australian dollar steady after jobs data amid risk off sentiment
The Australian dollar was steady after jobs data was largely inline; today’s data is against a backdrop of a strong domestic economic outlook and the RBA are validated for raising rates. Will more hikes boost AUD/USD?
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The Australian dollar held its ground after the April unemployment rate came in at 3.9% as forecast and against 4.0% previously. This is the lowest Australian unemployment rate since the 1970s. The overall change in employment for the month was 4k instead of 30k anticipated. Full time employment increased a whopping 92k, while part time jobs decreased 88k.
With uncomfortably high inflation, today’s number opens the way for the RBA to continue to hike rates and potentially accelerate the lifting cycle to rein in loose policy. However, domestic factors appear to be sidelined for the exchange rate for now. The Aussie was pummelled overnight in a classic risk off trading environment after the reality of steep monetary tightening globally became apparent to a seemingly complacent equity market.
When it comes to growth versus inflation, central banks have erred on the side of fostering growth at the expense of living with high inflation. This is born out of the 1970-80s period of high inflation. At that time, US Federal Reserve Chair Paul Volker got the backing of two successive administrations, from both sides of the aisle, to get inflation under control. He did so through several highly restrictive policies. One of these was a move to very high interest rates.
The cost of this policy was two severe recessions in the 1980s. The market appears to have woken up to this stark reality for the current situation. Cheap money of this era is being consigned to history at a rapid rate of knots. With central banks focused on fighting inflation, risk assets that rely on cheap funding now have their business models questioned. As an example, special purpose acquisition companies (SPAC), once the darlings of the recent free-money environment, are facing difficulties raising cash - if they can at all.
More concerning has been the recent disappointing reporting results from real economy companies in the US. This backdrop leads to growth linked currencies like the Aussie coming under pressure, while perceived safe-haven currencies like the US dollar, Japanese yen and Swiss franc attract inflows.
Movements in the USD (DXY) index seems to be driving AUD/USD for now.
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This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
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