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AUD Breaking Out Despite Terrible Employment Report

Published 10/20/2016, 08:35 AM
Updated 05/19/2020, 04:45 AM

The AUD bulls were progressively getting the upper hand on AUD/USD, given the attraction of owning the AUD in a low volatility environment, amid firm iron ore and oil prices. In fact, we saw price closing the Wednesday session above the May 2015 downtrend at $0.7690 (on the daily chart), which of course is bullish.

However, as we have seen so often in 2016, when the market starts to get excited about a trend developing, we see the news flow, throwing doubt into traders mindsets, and that has occurred somewhat today with a poor September employment report.

On one hand, we have seen the unemployment rate tick down to 5.6%, but this was a function of a drop in the participation rate to 64.5%. There has been a huge 53,000 loss of full-time jobs, although this has been offset to a degree by a 43,200 gain in part-time jobs. The net effect of all these factors has been a slight increase in the implied probability of a November rate cut to 19%, as priced in the swaps market.

We’ve seen a strong rally in the bond market, with the Australian three-year bond falling five basis points. In the FX markets, AUD/USD followed the sharp move lower in Aussie bond yields and at the time of writing, is back oscillating around the May 2015 trend support. If the selling garners momentum into European trade, it will be interesting to see if we get a close below yesterday’s low of $0.7659, which would therefore print a bearish reversal pattern and potentially mark a top in the recent rally from $0.7506.

Personally, I don’t think this employment report will push the RBA to think more seriously about further rate cuts, but there’s no doubt it’s a poor number. Things get very interesting if we get a weak Q3 inflation report next Wednesday, especially after RBA Governor Lowe has emphasised the importance of this print.

We would need an inflation print that really throws doubt around the Reserve’s Banks inflation estimates. That comes on a trimmed mean (quarter-on-quarter) inflation print below 0.2%, but this seems unlikely, and I wouldn’t be surprised to see this closer 0.4%. A 0.4% qoq (trimmed mean) inflation should take any idea of rate cut this year off the table, which should support the AUD.

AUD/USD Daily Chart

Weekly chart

AUD/USD Weekly Candlestick Chart

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