The Aussie dollar was already having a difficult week before sliding below 68 cents as Australia reported a fall in employment in October. The Aussie is the softest currency in the G10 over the past week as pricing for another RBA rate cut has picked up.
We should note that the last time the Aussie traded below 68 cents was the 17th of October, which happens to be the date of the September labour force survey, which reported a fall in the unemployment rate to 5.2%.
This raises some caution that markets could be over-reacting to monthly volatility. Pricing for the RBA to cut rates in February 2020 jumped from about 50% to 75%. Given that the RBA last week forecast the unemployment rate to sit around 5.2% through end-2020, the recent gyrations in the official data from 5.2% to 5.3% are unlikely to move the dial greatly.
However, Westpac was already predicting a February rate cut, so we won’t complain about market pricing moving closer to our view. The RBA is closely focused on the labour market and It was not a great week on that front. Along with the rise in the unemployment rate, October employment dropped 19,000, the largest monthly fall since 2016.
The fall in jobs followed another soft reading on wages growth in Q3. Overall wages grew just 2.2% over the year to September, down from 2.3% in June. The RBA would like to see wages growth closer to 3 ½ per cent in order for inflation to return to the middle of their 2 to 3% target band.
Updates on Australian consumer sentiment and business confidence were also on the soft side of long term averages, to round out a fairly poor week of Australian economic data. But global factors have also chipped away at the Aussie. Asian currencies and equities have struggled in recent days.
Federal Reserve chair Powell and his colleagues are reiterating their view that the US economy and policy are “in a good place” but it is not a phrase heard often in Asia right now. Deepening unrest in Hong Kong is causing jitters, while Chinese industrial production growth was just 4.7% over the year to October. Before this year, production growth hadn’t been below 5% since 2002.
While the Aussie was the laggard among G10 currencies this week, safe havens the Swiss franc and Japanese yen outperformed as global nervousness increased and bonds rallied. Joining them however was the risk-sensitive kiwi, which rose sharply as the Reserve Bank of New Zealand surprised most forecasters by holding its cash rate at 1%. Governor Orr claimed that economic developments since their last quarterly statement in August did not warrant a change in policy stance.
Westpac expects the RBNZ to cut its cash rate to 0.75% in February, mostly due to global developments such as trade tensions. With the economic calendar in the week ahead fairly quiet, news such as faltering US-China trade talks and Hong Kong turmoil are likely to be the focus for financial markets. We will discuss the latest developments when we speak to you next week.