The Australian dollar extended its slide on Thursday. AUD/USD is trading at 0.6884 in Europe, down 0.82%.
Australian employment data disappoints
Australia’s December employment report was weaker than expected, sending the Australian dollar sharply lower. The headline reading showed a loss of 14,600 in total employment, which may have soured investors. The release wasn’t all that bad, as full-time jobs showed gains of 17,600, with part-time positions falling by 32,200. The unemployment rate remained at 3.5%, but this was a notch higher than the forecast of 3.4%.
On the inflation front, recent releases point to inflation moving higher. November CPI rose to 7.3%, up from 6.9%, and the Melbourne Institute Inflation Expectations climbed to 5.6%, up from 5.2%. We’ll get a look at the all-important quarterly inflation reading next week.
Inflation came in at 1.8% q/q in Q3, and an acceleration in Q4 would force the Reserve Bank of Australia to consider raising rates higher and for longer than it had anticipated. The cash rate is currently at 3.10%, and I expect the RBA will raise it to 3.50% or a bit higher, which means we are looking at further rate hikes early in the year.
The US dollar seems to take a hit every time there is a soft US release, and this week has had its share of weak data. The Empire State Manufacturing Index sank to -32.9, while headline and core retail sales both fell by -1.1%. PPI came in at -0.5%. All three releases were weaker than the November readings and missed the forecasts, indicating that cracks are appearing across the US economy as the bite of higher rates is being felt.
The markets are clinging to the belief that softer numbers will force the Fed to ease up on its pace of rate hikes and possibly end the current rate cycle after a 25-bp increase in February. The Fed has done its best to dispel speculation that it will pivot, but I expect the US dollar to lose ground if key releases are weaker than expected.
AUD/USD Technical
- AUD/USD is testing support at 0.6893. Below, there is support at 0.6810
- 0.6944 and 0.7027 are the next resistance lines