Employment Gains In Australia Translate Into A Firmer Bottom For The Australian Dollar

Includes: FXA
by: Duru


The Australian jobs report for March showed encouraging signs of strength.

The growth in full-time employment dampened expectations for a May rate cut and added more momentum to the Australian dollar's bounce from recent lows.

The Australian dollar seems poised to maintain a trading range that will offer a healthy variety of trades.

The recent decrease in Australia's unemployment rate seemed insignificant on the surface, but the change generated a large revision downward for rate expectations and a strengthening in the Australian dollar (NYSE:FXA).

The Australia Bureau of Statistics reported a drop in the unemployment rate from a revised 6.2% in February to 6.1% in March. Employment increased by 37,700 - 31,500 of this increase was from full-time employment. Moreover, the number of unemployed decreased by 1,500 to 764,500. On a regional basis, Western Australia delivered the most notable change with the unemployment rate dropping from 5.7% to 5.5% even in the face of on-going pressures on its commodity-based industries.

The Australian dollar's reaction was swift. The momentum was marginally sustained through the U.S. trading session. The 15-minute chart below shows that the reaction was really follow-through to earlier strength. The daily chart suggests that the Australian dollar has likely found a bottom for a while: the poor China trade numbers that caused such concern to start the week are suddenly becoming a distant memory.

The Australian dollar's strong response to the jobs number continued earlier momentum

The recent lows formed by the Reserve Bank of Australia's February rate cut appear to be holding

Source: FreeStockCharts.com

Note well that the Australian dollar has failed to weaken further since the Reserve Bank of Australia cut rates in February. This lack of response was likely partly responsible for the failure of the RBA to cut during the last two meetings. Now, this encouraging strong jobs report has convinced the market to dampen its expectation for a May rate cut. The odds for a rate cut to 2% plunged from 76% to 57%. The odds were as high as 79% two and three days ago.

A plunge in expectations for a rate cut next month

Source: ASX RBA Rate Indicator

While I suspect the Australian dollar has bottomed for the near term, I am still looking to expand my short position against the Australian dollar versus the U.S. dollar. Even if recent lows do not break, I expect those levels to get revisited several more times going forward. I also still like hedging that bet with shorter-term long positions in the Australian dollar against other major currencies, especially the euro and the British pound. This approach worked particularly well over the last few major economic events. I am no longer aggressively bearish as a strong catalyst is missing to push the Australian dollar through recent lows. The Reserve Bank of Australia (NYSE:RBA) will be hard-pressed to devise a catalyst for driving a lower exchange rate as long as lower rates tend to make the market anticipate the end of this rate cycle rather than an extension of the easing cycle.

Be careful out there!

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: In forex, I am net short the Australian dollar