Australian dollar drops on jobs data that may assist the RBA

[MongiIG]

The Australian dollar slid lower after the unemployment rate ticked up; it might be a case of bad news is good news for the RBA and the inflation fight and the overnight low has held so far.

 

Source: Bloomberg

 

Forex Inflation Unemployment Consumer price index Australia Risk

Daniel McCarthy | Strategist, | Publication date: Thursday 18 May 2023 

The Australian dollar dipped after a soft jobs report that saw a bump up in the unemployment rate that could help to alleviate price pressures which might see the RBA refrain from hiking in June.

The unemployment rate was 3.7% in April against the 3.5% anticipated and prior. -4.3k Australian jobs were lost in the month, which was notably below the 25k anticipated to be added and 53.0k previously. Of note was the full-time job losses of -27.1k.

The interest rate market is now pricing in a less than 50-50 chance of a lift in the cash rate by the RBA in the third quarter.

An increase in the unemployment rate would not normally be a cause for celebration but in the current environment of red-hot CPI at 7.0%, it has provided a sigh of relief in some quarters.

Yesterday saw the wage price index rise by 0.84% quarter-on-quarter for the first 3 months of this year against 0.85% prior. This gives a year-on-year figure of a 3.7% increase.

Across the public and private sectors, negotiations are currently underway for wage increases to keep up with inflation. The Australian economy is seeing a price-wage inflation spiral rather than a wage-price spiral which was the case in the 1970s and 80s.

If salaries are to increase in line with CPI, then inflation might be seen as being entrenched and/or embedded. That is not what central bankers like to see.

If price expectations are such that consumers expect items to be more expensive in the future, then generally speaking, they are prepared to pay more for them today. Monetary policy plays a significant role in hosing down these perceptions.

So, while today’s jobs report might give the impression of an easing of the tight labour market, the RBA still has its work cut out. At their last meeting, they cited the risk of CPI reaccelerating to keep the gauge out of the 2-3% mandated target band.

The AUD/USD dipped to 0.6630 immediately after the data but recovered some ground in the aftermath. The overnight low was 0.6629.

The ASX 200 saw similar price action and remains in the green on the day at the time of going to print.

AUD/USD price reaction to jobs data chart

 

Source: TradingView

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