AUD/USD Analysis: AU employment keeps hawkish pressure on the RBA

Key takeaways from Australia’s June employment report

75.9k jobs were added (61.7k were full-time)
Unemployment fell to 3.6%(3.7% previously)
Participation increased to 66.9% (a record high)
These are very strong numbers which keep pressure on the RBA to hike
The hawkish Fed meeting piles additional pressure on the RBA to hike

AUD/USD quickly reversed the session’s earlier losses with another firm employment report, with unemployment falling back to 3.6% and 75.9k jobs added. By historical standards, the employment situation remains very tight and that keeps the pressure on the RBA to hike once or twice more, and that’s before we take the Fed’s hawkish meeting into account.

The RBA hiked rates by 25bp on June 6^th to take their cash rate to 4.1%, warning that “some further tightening may be required”. We’d all like to see the peak, but the threat of further hikes linger.

Since then, we’ve seen Q1 GDP soften to a 1.5-year low, exports fall -5% y/y and various measures of business and consumer sentiment fall. From this angle, it could have looked like the RBA were on track to pause their tightening cycle again in August. Yet the Fed’s potential to hike by another 50bp between now and the end of the year certainly places pressure on the RBA to hike again regardless. And that then leaves the conundrum over whether to wait for the Fed to hike or front-run them instead by hiking anyway. Of course, CPI data on June 28^th will be a key factor in determining the RBA’s next decision who remain very much in data-dependent mode, but any hot data going forward becomes all the more important whilst the Fed have their fingers hovering over the big red hike button.

Weekly AUD/USD chart with large speculator positioning:

AUD/USD is on track to rise for the first bullish month in five, despite large speculators remaining net-short Aussie futures. Admittedly they’re not at a bearish extreme, but today’s employment figures will likely make at lease some of those bears question their exposure to the Aussie’s downside, especially if we do see a convincing break above 68c.

With that said, soft data from China and a hawkish Fed could also mean the upside remains capped to a degree. And a sustainable rally for AUD/USD likely requires appetite for risk to remain elevated, which cold become difficult as the year progresses if the Fed (and their fellow central bans) continue to hike rate and make their narrow path to a soft landing the more difficult to find and tip economies into a recession. Which is what we saw with New Zealand on today’s GDP report, as the economy has been tipped into a technical recession.

AUD/USD 1-hour chart

We’re not seeing the decisive, directional move I had hoped for after today’s economic data. Instead, AUD/USD is caught between key levels of support and resistance as traders mull over the competing data. Whilst the strong employment report warrants RBA hikes, China’s data was below par 10 minutes later and the Fed remain hawkish.

Technically, there appears to be strong demand around 0.6500, so if prices drift towards these lows then it might pique my bullish interest, for a move back towards 0.6800 / ‘RBA-pause’ highs
A break above 0.6800 assume bullish continuation, in line with its trend
A break below 0.6470 invalidates the bullish bias and assumes mean reversion towards 0.6700

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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