FX comment – AUD extends gains after stronger than expected employment numbers

by: Roy Teo

  • Australian dollar gains after stronger than expected employment numbers
  • Dilemma for the RBA
  • Still a case for the RBA to ease in May
  • Fade the AUD rally towards 0.79

 

Australian dollar gains after stronger than expected employment numbers

The Australian dollar (AUD) extended overnight gains after the Australian economy added 37.7k jobs in March, more than double market expectations of 15k increase. Despite a higher job participation rate, the unemployment rate declined to 6.1% (February revised lower from 6.3% to 6.2%). Though the AUD gains above 0.7739 resistance is significant technically, short term technical indicators imply that the currency is in overbought territory and hence some profit taking could materialise later in the day.

Rate cuts in May or June?

Financial markets have delayed their next Reserve Bank of Australia (RBA) rate cut expectations from May to June. Since the RBA decided to leave monetary policy unchanged on 7 April, economic data releases have been mixed. On the bright side, the construction sector recovered strongly in March after previous four months of contraction. Furthermore business conditions and confidence have improved. Iron ore prices have also recovered 5% to above USD 50. On the other hand, consumer confidence has continued to decline for two consecutive months. In addition, there are encouraging signs that home loans for investment and speculation are slowing.

Dilemma for the RBA

Though we acknowledge that recent economic data releases have provided more flexibility for the RBA to pause next month, we think that there are still strong arguments for a rate cut sooner than later. We think that the recent improvement in job market is transitory. Indeed job advertisements have declined in March, implying that the job market remains soft and the recent job gains is unlikely to persist. Australia iron ore exports value has also declined to the lowest level in two years. We will reassess our rate cut call in May after Q1 inflation numbers on 22 April.

Fade the AUD rally towards 0.79

We think that the recent recovery in the AUD will fade below 0.79. Stronger gains in the currency is expected to weigh on tradable inflation and exports. In our view we think that the RBA should cut interest rates sooner than later given a stronger than desired exchange rate, soft labour market and wages, low inflation, slow rebalancing in the economy and lack of fiscal stimulus given the decline in commodity tax revenues. Housing market concerns should be addressed via more specific macro prudential tools.