- Australia’s unemployment rate is forecast to remain unchanged at 4.2% in August.
- The change in employment is expected to be 25,000, more than half of the 58.2K recorded in July.
- AUD/USD is trading below 0.6800, with a bullish bias following the Federal Reserve decision.
The Australian Bureau of Statistics (ABS) will release the monthly employment report at 1:30 GMT on Thursday. The country is expected to have added 25,000 new jobs in August, while the unemployment rate is forecast to remain stable at 4.2%. The Australian Dollar (AUD) comes into the event on a firmer note against its US rival (USD), with AUD/USD hovering around the 0.6770 level.
The ABS reports on the change in employment by separating full-time and part-time positions. By its own definitions, full-time jobs involve working 38 hours per week or more and usually include additional benefits, but primarily represent consistent income. On the other hand, part-time employment generally means higher hourly rates but lacks consistency and benefits. That is why full-time jobs carry more weight than part-time jobs when setting a direction for the AUD.
In July, the monthly employment report showed that Australia managed to add 60,500 full-time jobs while losing 2,300 part-time positions, resulting in a net employment change of 58,200. Meanwhile, the unemployment rate rose to 4.2% from 4.1% previously.
Australia’s unemployment rate is expected to remain stable but high in August
As mentioned above, financial markets expect the unemployment rate to remain unchanged at 4.2% on a monthly basis. Job creation is expected to continue, albeit at a slower pace.
Australia’s unemployment rate jumped to 4.2% in July, which looks like good news for the Reserve Bank of Australia (RBA) as it is a sign of a more flexible labour market, which will eventually support an interest rate cut.
The RBA has kept the official cash rate (OCR) at 4.35% since raising it to that level in November 2023, being one of the central banks that shows no interest in cutting interest rates.
And there is a good reason: Australia’s inflation rate rose to 3.8% year-on-year (YoY) in the second quarter of the year, in line with expectations but higher than the 3.6% recorded in the first quarter. It was the first acceleration in the annual Consumer Price Index (CPI) since 2022 amid higher inflation for both goods and services.
In fact, growth remains sluggish in the country. According to the latest Gross Domestic Product (GDP) release, the economy grew by a modest 1% year-on-year in the second quarter of the year. Taking the 2023-24 fiscal year as a whole, the economy expanded by 1.5%, the weakest since 1991-92, excluding the 0.3% contraction during the pandemic-hit year, according to the ABS.
Finally, it is worth noting that RBA Governor Michele Bullock said that market expectations for an interest rate cut “do not align” with the Board’s thinking. What’s more, Bullock noted that it is doing its job, which is to tame inflation, suggesting that policymakers are not putting economic performance above their mandate.
“If the economy broadly evolves as anticipated, the Board does not expect to be in a position to cut rates in the near term,” Bullock added.
When is the Australian jobs report coming out and how could it impact AUD/USD?
The ABS will release the August employment report early on Thursday. As mentioned above, Australia is expected to have added 25,000 new jobs in the month, while the unemployment rate is forecast to remain at 4.2%. Finally, the participation rate is expected to remain at 67.1%.
The AUD/USD pair is trading near the 0.6800 price zone ahead of the event and following the Federal Reserve (Fed) monetary policy decision. The US central bank opted for an aggressive interest rate cut of 50 basis points (bps), making the overall decision more dovish than anticipated. Financial markets welcomed the news and sold the Dollar, while stock markets rose, supporting the AUD/USD.
After the dust settled, stocks pared Fed-inspired gains and helped the US Dollar recover against its major rivals. From a technical perspective, Valeria Bednarik, Chief Analyst at FXStreet, notes: “The AUD/USD pair is bullish and trading near its recent highs at 0.6823. The pair may reach the level on a better-than-anticipated August jobs report. The December high at 0.6870 is the next level to watch and a possible upside target, although the numbers really have to shake up the markets to drive such a rally.”
Bednarik adds: “AUD/USD is likely to trade on market sentiment. Disappointing employment figures may have a negative effect on the AUD/USD pair. Support can be found in the 0.6740 region before the 0.6700 threshold.”
Employment FAQs
Labour market conditions are a key element in assessing the health of an economy and therefore a key factor in currency valuation. A high level of employment, or a low level of unemployment, has positive implications for consumer spending and therefore economic growth, which boosts the value of the local currency. On the other hand, a very tight labour market – a situation where there is a shortage of workers to fill vacant positions – can also have implications for inflation levels and therefore for monetary policy, as a low labour supply and high demand leads to higher wages.
The pace at which wages grow in an economy is key for policymakers. High wage growth means that households have more money to spend, which often translates into higher prices for consumer goods. Unlike other, more volatile sources of inflation, such as energy prices, wage growth is seen as a key component of underlying and persistent inflation, as wage increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding their monetary policy.
The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks have mandates explicitly related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank (ECB) has only one mandate: to keep inflation under control. Still, and regardless of their mandates, labor market conditions are an important factor for policymakers given their importance as an indicator of the health of the economy and their direct relationship with inflation.
The RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages Australia’s monetary policy. Decisions are made by a Board of Governors at 11 meetings per year and at ad hoc emergency meetings as necessary. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2%-3%, but also to “…contribute to currency stability, full employment and the economic prosperity and well-being of the Australian people.” Its main tool for achieving this is to raise or lower interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other tools of the RBA are quantitative easing and monetary tightening.
Although inflation has traditionally always been considered a negative factor for currencies, as it reduces the value of money in general, the opposite has actually occurred in modern times with the relaxation of cross-border capital controls. Moderately high inflation now tends to lead central banks to raise their interest rates, which in turn has the effect of attracting more capital inflows from global investors looking for a lucrative place to store their money. This increases the demand for the local currency, which in Australia’s case is the Australian dollar.
Macroeconomic data gauges the health of an economy and can impact the value of its currency. Investors prefer to invest their capital in safe, growing economies rather than in weak, shrinking ones. Greater capital inflows boost aggregate demand and the value of the domestic currency. Classic indicators such as GDP, manufacturing and services PMIs, employment and consumer sentiment surveys can influence the AUD. A strong economy may encourage the Reserve Bank of Australia to raise interest rates, also supporting the AUD.
Quantitative Easing (QE) is a tool used in extreme situations where lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) in order to purchase assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is carried out after QE, when the economic recovery is underway and inflation is starting to rise. While in QE the Reserve Bank of Australia (RBA) buys government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets and stops reinvesting the maturing principal of the bonds it already holds. This would be positive (or bullish) for the Australian dollar.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
