AUD breaking out despite a terrible employment report

The AUD bulls were progressively getting the upper hand on AUD/USD, given the attraction of owning the AUD in a low volatility environment, amid firm iron ore and oil prices.

AUD
Source: Bloomberg

In fact, we saw price closing the Wednesday session above the May 2015 downtrend at $0.7690, which of course is bullish. However, as we have seen so often in 2016, when the market starts to get excited about a trend developing, we see the news flow throwing doubt into traders’ mindsets. This has occurred today, with a poor September employment report.

On one hand, we have seen the unemployment rate tick down to 5.6%, but this was a function of a drop in the participation rate to 64.5%. There has been a huge 53,000 loss of full-time jobs, although this has been offset slightly by a 43,200 gain in part-time jobs. The net effect of all these factors has been a slight increase in the implied probability of a November rate cut to 19%, as priced in the swaps market. We’ve seen a strong rally in the bond market, with the Australian three-year bond falling five basis points. In FX, AUD/USD followed the sharp move lower in Aussie bond yields and is oscillating around the May 2015 trend support. If the selling garners momentum into European trade, it will be interesting to see if we get a close below yesterday’s low of $0.7659, which would therefore print a bearish reversal.

Personally, I don’t think this employment report will push the Reserve Bank of Australia (RBA) to think more seriously about further rate cuts, but there’s no doubt it’s a poor number. Things get very interesting if we get a weak Q3 inflation report next Wednesday, especially after RBA governor Dr Lowe has emphasised the importance of this print. We would need an inflation print that really throws doubt around the RBA’s inflation estimates. That comes on a trimmed mean (quarter-on-quarter) inflation print below 0.2%, but this seems unlikely and I wouldn’t be surprised to see it closer to 0.4%. A 0.4% quarter-on-quarter (trimmed mean) inflation should take any idea of a rate cut this year off the table, which should support the AUD.

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