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Aussie dips on weak employment reports and wage growth slowdown

May 16, 2024

Key Points: 

  • Australian dollar drops below $0.67 against the US dollar following weak employment data. 
  • Increased unemployment and slow wage growth reduce rate hike expectations. 
  • With optimism in economy of China, the Australian dollar may be bolstered as it is likely there will be increase in export demand. 

The Australian dollar dipped below $0.67 against the US dollar (Symbol: AUDUSD), responding to weaker-than-expected domestic employment data. The latest report revealed that Australia’s unemployment rate increased to 4.1% in April from 3.8% in March. This rise in unemployment, coupled with a slowdown in wage growth in the first quarter, has led markets to rule out further interest rate hikes from the Reserve Bank of Australia (RBA), as it appears inflationary pressures may not be as persistent as previously thought. 

Government budget aims to ease living costs 

In response to rising living costs, the Australian government’s recent budget outlines measures to alleviate financial pressures on households. The government plans to spend billions on cutting energy bills and rent, while also reducing income taxes. These steps are designed to provide some relief to consumers, potentially boosting domestic consumption in the short term. 

External influences and support for AUD 

Despite the domestic challenges, the Australian dollar remains close to four-month highs, buoyed by external factors. Slowing inflation in the US has reinforced expectations that the Federal Reserve will start cutting interest rates later this year. This expectation has provided some support to AUD, as lower interest rates in the US typically weaken the USD, making other currencies more attractive. 

Additionally, increased expectations of fiscal support for the Chinese economy have bolstered the AUD. Recent moves from Beijing in implementing larger stimulus measures through long-dated bonds have raised hopes for increased economic activity in China, who is also the largest trading partner of Australia. This potential boost to Chinese demand for Australian exports offers some optimism for the AUD. 

In 2015, the Australian economy faced similar pressures from slowing wage growth and rising unemployment. Back then, the RBA decided to cut interest rates, which provided short-term relief but also highlighted the sensitivity of the currency to domestic economic indicators. 

Another relevant example is the 2008 financial crisis, where coordinated fiscal stimulus efforts across major economies helped stabilize markets. The Australian government’s current budget measures, aimed at reducing living costs, mirror such fiscal interventions, potentially providing some buffer against economic headwinds. 

Opportunities 

As the Australian market navigates these dynamics, traders should approach the market with a balanced perspective, considering both the risks and opportunities presented by the current economic environment. Consider looking into currency pairs related to the AUD, such as AUDUSD, AUDJPY, AUDCHF and AUDCAD, as more volatility being unfolded also presents more opportunities for traders to profit from the market. 

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