Close to 80 but no cigar, yet. Markets perceived the employment set to be a net positive to promptly bid AUD higher, only to book profit just shy of the milestone
AUD extended gains as employment was seen as a net positive. As there was an expectation for employment to soften slightly, the realisation of the fact came as no surprise. Unemployment ticked higher to 5.6% as expected and employment change increased by +14k verses +15k expected (down from 38k prior). The higher participation rate took the edge off of the slightly higher unemployment rate, which we expect to soften over the coming months as capacity utilisation continues to increase.
Part-time employment weighed heavily on total jobs number yet full-time employment increased by 62k, allowing markets to see the a healthier underlying employment change other than the 14k presented.
AUDUSD stopped just shy of 80c although we’d be surprised if this key, psychological level broke upon first attempt as temptation to book a quick profit may be high. But unless we hear a verbal intervention of some sorts, we should be above 80c soon enough. Volatility is something to also note as the past two weeks are already bordering on an outlier. Last week’s close was its most bullish week since Feb and if you look across the percentage changes, you’ll see that volatile weeks are not exceeded and, often, the subsequent week’s range is sanguine. As this occurs below the 80c level and the risk of verbal intervention is potentially rising, this may pour water on volatility for the bulls. However, a break above 80c is a milestone worthy of seeking bullish setups on lower timeframes (intraday) if you remember the volatility potential theoretically goes down the higher we trade.
RBA Assistant Governor Guy Debelle speaks tomorrow and traders are on guard for a potential jawbone. With sentiment and technicals on AUD remaining very much bullish we have moved beyond levels which have previously warranted a verbal intervention of some sort. Throughout 2016 the statement included “An appreciating exchange rate could complicate’ the economic adjustment when AUD traded between 0.732-0.77. In 2017 this was switched from ‘could complicate’ to ‘would complicate’ for the same range, yet AUD now trades just shy of 0.80. The last time AUD traded at these levels was in 2015 when the language used within the statement was quite bluntly ‘further depreciation is likely / necessary’.
Focus now shifts to the BoJ meeting where we think AUDJPY is headed for Y90. Yen outflows are likely to persist over the coming weeks and a lower inflation outlook from BoJ should help support carry trades.
In some ways is it not fair to directly compare the levels over time as the economic background has changed over this period. Yet it has not improved to the point where AUD will be comfortable with a higher AUD. In the backdrop of a weaker USD whilst the Fed find data hard to truly justify another hike, it may also be the RBA’s perception of this extra hike as to whether they try to publicly talk AUD down between meetings. If they were banking on the Fed to hike and effectively remove the 25bps positive carry AUDUSD currently has, then there is good reason to expect verbal intervention at some point. Tomorrow may just be that day.
