RBA resumes data-dependent approach
In contrast to other major central banks, the Reserve Bank of Australia (RBA) hiked interest rates in November under its new chair Michelle Bullock after a four-month pause. But the announcement was well anticipated and a slight dovish tweak in guidance was enough to hammer the Australian dollar.
The central bank judged that another quarter percentage rate increase to 4.35%–the highest in twelve years–was necessary to achieve its 2.0% midpoint inflation target, as progress on inflation had been slower than previously anticipated, despite passing its peak. Nevertheless, the RBA refrained from providing any commitment to additional tightening, linking the future path of rates to a data-dependent approach as the Fed did.
Employment growth to strengthen but nothing cheering expected
Thursday’s employment report for October will be the first piece of data information after the RBA’s latest policy meeting and given the central bank’s dual mandate of price stability and full employment, aussie traders might be sensitive to the headlines.
That said, the results may not excite traders. Analysts foresee a mixed report, with jobs growth accelerating by 20k in October from 6k previously and the unemployment rate inching up to 3.7% from 3.6%. That could still be among the weakest surveys so far in 2023.
Recall that job creation was three times larger in Australia during the previous months, while the unemployment rate was ranging between 3.5%-3.7% throughout the year. Hence, the data must surprise significantly to fuel strong volatility in the aussie.
Perhaps, the monthly CPI indicator due on November 29th could be a bigger market mover following the continuous increase in October to 5.6% y/y. Futures markets are currently pointing to steady interest rates in December, but they reflect a potential for another rate increase to 4.6% at some point during February-September 2024 as the central bank does not expect inflation to return to 2.0% before 2025.
On the other hand, the RBA believes that the unemployment rate could stretch up to 4.2% in 2024–the highest since early 2022. Taking into account the recent record growth in population and the supply restraints in the housing sector, household spending could keep supporting inflation.
Interestingly, quarterly wage growth hit a fourteen-year high of 1.3% in Q3, suggesting that employees can still bargain for higher payments despite the surge in population. The problem here is that if the positive trend in wages continues, the RBA might have some difficulty in achieving its inflation target.
Turning to FX markets, AUDUSD resumed its positive momentum after the upbeat wage data earlier today, stretching Tuesday’s rocket rally above the key nearby resistance of 0.6520 and to a high of 0.6540. A few hours later, a soft positive surprise in US retail sales pressed the pair back below that ceiling.
Investors will look at whether the employment report can help the pair reach its falling 200-day exponential moving average (EMA) higher at 0.6565 on Thursday, and perhaps challenge the 0.6600 psychological mark too.
A disappointing report could alternatively squeeze the pair towards the 0.6450 constraining zone, while a more aggressive decline could take a breather around the 20- and 50-day EMAs at 0.6400.