The Latest Australian Jobs Report Supports AUD/USD & RBA’s Tightening Prospects

Australian Economic Data

Australian Unemployment dropped to the lowest level since 1974 in April, coming in at 3.9% from 4% prior, as today's data showed. The rest of the report however was less impressive, since there were just 4K jobs added (from +17.9K prior), while the participation rate ticked down to 66.3% (from 66.4% prior.

In late April, Headline CPI Inflation had jumped 5.1 in the first quarter of the year (year-over-year), from 3.5% prior. The Trimmed Mean, which excludes large price rises and falls, rose to 3.7% year-over-year, the highest level since March 2009.

On the GDP front, the economy grew during the last quarter of 2021, since Gross Domestic Product increased 3.4%, compared to the prior quarter and 4.2% on a year-over-year basis.

Reserve Bank of Australia Projections

Earlier in the moth, the country's central bank had published the Statement on Monetary Policy (SOMP), which includes its updated economic projections.

The RBA sees the Unemployment Rate dropping further, as low as 3.5% in early 2023 and expects it to "remain around this level thereafter".

Inflation is expected to climb even higher, with the Headline Consumer Price Index (CPI) peaking at around 6% in the second half of the year, a big leap from the previous forecast of 3.25%.

Gross Domestic Product is projected to slide to 3.25% in the first half of this, a massive downgrade from the previous 5% projections, while over the second half it is expected come in at around 4.25%,

RBA Tightening Path

The Reserve Bank of Australia has been far behind its major counterparts, in reducing the monetary stimulus, but had been getting increasingly hawkish (or less dovish) this year. In February it had stopped buying government bonds and earlier this month it increased interest rates for the first time since November 2010. ^[2]

This was a 25 basis points adjustment and the Board pointed to more tightening ahead, noting that bringing inflation down "will require a further lift in interest rates over the period ahead".

The US Federal Reserve however is far more aggressive in tightening monetary policy, since this month it delivered its second consecutive rate hike and the largest in more than 20 years, while Chair Powell reasserted the bank's hawkishness and commitment to fighting inflation this week, with his comments on Wall Street Journal's Future of Everything Festival. ^[3]

Risk Sentiment

Market Sentiment took a nosedive on Wednesday, in the aftermath of Mr Powell's hawkish rhetoric and the bad quarterly results from major US retailers. Target (TGT.us) took a hit in its profits and margins and the sector's poor results aggravated fears of stagflation.

Today, the mood seems showed signs of improvement, partially helped by further commentary about prospects of US cutting some tariffs imposed by the previous administration China. US Treasury Secretary Ms Yellen mentioned that discussions are "underway in the administration", adding that sees a case for such action. ^[4]

The rest of economic calendar does not include any major economic releases, but the Australian Election take place on Saturday May 21.

AUD/USD Analysis

Today's unemployment data from Australia, support the central bank's tightening prospects and along with the better risk-tones suring the Asia-Pacific seesion, the pair reacted higher. This may give it another chance to break above mid-0.7000s, but we are cautious around the ascending aspirations at this stage. Sustained risk-on mood will be needed in order to surpass the 0.7086-0.7100 area.

Market sentiment is fragile, as investors monitor various risk factors, such as the prospects of stagflation and despite the boost from today's data, AUD/USD is in a precarious position. Downside momentum is intact and this could lead to fresh pressure towards 0.6900, but last week's two year lows (0.6829) seem distant at this point.