The Australian dollar has been having a rough ride lately, sliding to two-and-a-half-year lows against the US dollar as the outlook for the world economy has deteriorated. The Reserve Bank of Australia’s recent dovish pivot hasn’t helped matters. However, the jury is still out on whether the RBA’s move was the right one or if it was premature. Thursday’s employment data (00:30 GMT) could be crucial if the numbers cast doubt on policymakers’ cautiousness.
Labour market is tight
Australia’s economy has been humming along quite nicely in 2022 despite a slightly bumpy start due to the lockdowns to tackle the Omicron wave. There was a solid rebound in GDP in the first half of the year, and although growth has been slowing in recent months, consumption remains strong and at 3.5%, the unemployment rate is the lowest since 1974.
Employment is expected to have increased by 25k in September, following a 33.5k rise in the prior month. The jobless rate is forecast to remain unchanged at 3.5%.
Are cracks starting to appear in the economy?
So what prompted this shift at the RBA? One of the things the central bank is most worried about is a crash in the housing market, as mortgage costs have shot up since May on the back of the aggressive rate hikes that have lifted the cash rate by 250 basis points. House prices have already started to fall, dropping sharply in the big cities such as Sydney and Melbourne. The combination of rising mortgage payments and soaring consumer prices is a lethal cocktail for households.
But far from implying that the job is done on policy tightening, it’s important to stress that the RBA is merely signalling that there’s no need to maintain a pace of 50-bps rate hikes. When considering that the RBA sets policy eleven times a year as opposed to eight or less for most other central banks, the dovish pivot isn’t as dovish as it might seem.
RBA pivot puts pressure on the aussie
Still, the decision has caused some angst that the RBA may have let its guard down too early. Thus, should the incoming data contradict policymakers’ concerns about a slowing economy, the aussie’s retracement could go beyond this week’s risk-on-driven bounce back.
At the moment, the aussie is testing the $0.63 level but another challenge looms at the next handle at $0.64, which corresponds with the 161.8% Fibonacci extension of the July-August upleg. Further up, the $0.6520 level might also be difficult to overcome as it proved impenetrable in late September/early October.
If the current rebound were to falter, the aussie could dip back towards the latest trough of $0.6169. A break lower would underscore the longer-term bearish pattern, opening the way for the $0.61 level, followed by the 261.8% Fibonacci of $0.5942.
Did the RBA make a policy mistake?
Deepening losses for the local dollar could become a problem for the RBA if it sinks any further as it would worsen the inflation problem by pushing up the price of imports. Policymakers will undoubtedly be paying close attention to next week’s quarterly CPI readings to gauge the speed at which inflation is accelerating.
With the Federal Reserve not expected to alter its hawkish policy stance anytime soon, the aussie could struggle for some time yet until either the RBA performs a U-turn on its dovish pivot, or it convinces the markets that it really does intend to keep hiking rates at every meeting, albeit by a smaller 25-bps increment.
