Preview: Australian jobs report in focus as RBA eyes next move; AUD/USD treads cautiously

The release of the Q1 Wage Price Index this morning did not provide a smoking gun for an RBA paying close attention to wages, prices, and productivity measures as it weighs the next move in its official cash rate.

Wages increased by 0.8% in the quarter, below economists' forecasts for a rise of 0.9% and the annual rate increased from 3.4% to 3.7%, its highest rate since 2012. However, today's numbers will reassure the RBA that wage growth is not accelerating at a pace inconsistent with its objectives of returning inflation to target.

As a side note, at 3.7%, annual wage growth is running well below the annual inflation rate of 7%, meaning real incomes continue to fall. However, the pace of real wage growth has picked up from -4.4% to -3.4% per annum.

Attention now turns to the Australian Labour Force report for April, released tomorrow at 11.30am AEST.

What is expected?

After a decline in January (-10.9k), employment bounced back strongly in February (+64.6k) and remained firm in March (+53k), keeping the unemployment rate steady at 3.5%.

For tomorrow's number, the market is looking for a +25k rise in jobs and for the unemployment rate to remain unchanged from March at 3.5%. The participation rate is expected to remain unchanged at 66.7%, just below record highs.

What would constitute a surprise?

The market will be looking for evidence that the RBA's aggressive interest rate hiking cycle is taking some heat out of a very hot labour market. Aware that another robust jobs report would increase the likelihood that the RBA raises the cash rate at its next meeting in June by 25bp to 4.10%.

Currently, the interest rate market sees just a 3% chance that the RBA will raise rates by 25bp in June but beyond that, there is 12bp or a 50% chance priced that the RBA will raise rates again by 25bp in August.

To this effect, should the unemployment rate print at 3.6% or higher, it would increase the chances that the RBA will stay on the sidelines in June and possibly beyond. This would be a small negative for the AUD/USD.

Conversely, should the unemployment rate print at 3.4% or lower, it would likely see the rates market increase the probability of a 25bp rate hike to 4.10% next month. This would be a small net positive for the AUD/USD.

AUD/USD technical analysis

The AUD/USD closed 1.63% lower last week at .6644 following a sharp fall in commodity prices, soft China data and as the US dollar gained on risk aversion/slowdown fears.

Besides a brief false break higher last week, the AUD/USD remains comfortable trading within its three-month .6800/.6550 range. When the range does finally break, we expect it to be downside towards .6500c.

AUD/USD daily chart

• TradingView: the figures stated are as of May 17, 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.