aussie takes a breather as economic data global risk softens 2686732017

There was a softness to today’s Australian economic data. Inflation expectations fell back from 4.3% to 4.1% for February, although the unemployment rate dropped to 5.7% from 5.8% for January, this was led by a rise in part-time employment, rather than full-time jobs, which saw a 44.8k decline on the month.

Overall, inflation looks like it could moderate back to the RBA’s target rate of 2-3%, the expectation for the weighted mean CPI rate, which is the CPI measure looked at by the RBA, was 2.5%, down from 2.6% in January, right in the middle of the RBA’s target rate. This eases the pressure on the RBA, and we expect the Bank to remain firmly on hold, with a neutral tone for some time.

The employment data was slightly more nuanced. We don’t think that the rise in par- time employment, seemingly at the expense of full-time employment, is going to cause the RBA to take a dovish stance any time soon. Rising levels of part-time employment are a global phenomenon, while the fall in full-time in employment was largely concentrated in the mining sector, and was mostly expected.

While employment rates in Western Australia, the mining heartland, have led Australian employment rates for years, NSW hasn’t seen employment growth since the start of 2016. However, there are signs that this is about to change, with lead economic indicators for NSW pointing to rising employment intensions in the coming months. Thus, this month’s data cannot be looked at in isolation, and we expect the RBA to prefer to see a trend in employment, with non-mining sectors of the economy playing catch up in rates of job creation, in the coming months.

The outlook for AUD/USD and ASX

Overall, we think that the Aussie and the ASX will continue to be driven by global forces and wide spread risk appetite, rather than by domestic forces, at least in the short-term. Although the ASX has failed to join the record-breakers club in the equity world this week, the next target is 6,000, a key technical level and the high from mid-2015. Whether or not we get there could depend on US equities continuing to hit record highs.

The Aussie is also likely to be driven by risk sentiment, as it is considered a commodity currency, and so is vulnerable to global market sentiment. My colleague Fawad Razaqzada, believes that the Aussie still looks strong from a technical perspective, even after today’s decline on the back of a general retreat in risk appetite. The short-term target for AUD/USD is 0.7835 – the high from 2016, and a significant level of resistance. A break-through here would open the door to a return to 0.80, and then 0.82 – the high from May 2015.

Figure 1:

Source; eSignal and City Index