FX comment – Strong employment gains supports the AUD for now

by: Roy Teo

  • Strong October employment gains supports the AUD for now…
  • … AUD to decline to 0.70 and 0.62 by end 2015 and 2016

 

 

Strong October employment gains supports the AUD for now…

The Australian dollar (AUD) spiked higher by more than 70 pips to above 0.7140 as the Australian economy added 58.6k jobs in October, more than market expectations of 15k. In addition, the unemployment rate declined from 6.2% to 5.9% despite the participation rate edging higher by 10bp to 65%. More importantly, full time jobs rose by 40k, the strongest number since September 2012. Earlier in the week, consumer confidence rose in November for the second consecutive month. This bodes well for retail sales in the coming months.

… AUD to decline to 0.70 and 0.62 by end 2015 and 2016

Despite the above positive news, we maintain our bearish stance on the AUD. We acknowledge that the employment and consumer confidence data releases this week have reduced the likelihood that the Reserve Bank of Australia (RBA) will need to ease monetary policy anytime soon. However we like to highlight that the strong full time job gains in October could be due to ‘pay back’ from weak numbers in previous months. In addition, the weak service PMI employment sub index in both September and October does suggest that the labour market will remain soft. Furthermore, there has been encouraging signs that tighter macro prudential tools is curbing housing investors’ thirst for loans. Given our view that inflation will continue to ease further, we maintain our view that the RBA is likely to lower the Official Cash Rate by 25bp to 1.75% in early 2016. As the Fed is likely to tighten monetary policy later this year in December and continue in 2016, we maintain our view that the AUD will decline to 0.70 and 0.62 by the end of 2015 and 2016 respectively. In our view the current short term relief rally in the AUD is likely to fade around 0.72.