Unemployment Data

There are three key bits of data that are released simultaneously, but the one that gets the most focus is the rate itself. This is seasonally adjusted data, which is relevant considering the large agricultural base in Australia.

Unlike the Fed, the RBA doesn’t have a mandate to keep unemployment low. However, employment rates can have implications for inflation, which is something the notoriously conservative central bank is concerned about.

So, even though the employment rate is one of the key data points of the monthly economic calendar, its impact on the currency is mostly indirect in the form of helping to form expectations of future inflation and economic trends.

One of the important factors relevant to Australia, in particular, is that as the unemployment rate drops to its structural level, it becomes increasingly harder for businesses to find employees, which can impact their productivity. This also causes salaries to rise, and the subsequent increased demand can translate into inflation. Australia’s CPI has been hovering close to the 2% target since January of 2017, keeping the RBA quite happy in this regard.

The Trends

However, during that period, the unemployment rate has been dropping, reaching a bottom of 5.0% in October. Where exactly the structural level is, is a matter of debate among economists, but there is a consensus that it’s somewhere between 4-6% depending on circumstances, and with unemployment in the current range, policymakers might be keeping a close eye on potential inflationary implications.

November’s unemployment rate came in at 5.1%, a tick up from the six-and-half year low of 5.0% registered during the two months prior. This happened despite employment increasing by 37K, well above market expectations of 20K, indicating that the unemployment trend is being driven more by demand for jobs than any underlying weakness in job creation.

Current expectations are for the rate to remain at 5.1% as registered in the prior month. It should be noted that the RBA expected that unemployment would reach 5.5% by the end of the year, but their assessment was that it would fall to that rate. The economy has, therefore, exceeded their expectations. In their latest statement, they project unemployment to reach 4.75% by the end of next year.

Components

Participation rate: The labor force participation rate has remained pretty steady for the last year, just fluctuating between 65.5% and 65.8%. November saw an uptick in the participation rate from 65.5% to 65.7%, explaining the increase in the unemployment rate. Expectations are for the rate to stay steady at 65.7%

Employment change: This is the number of jobs created during the month, and is helpful to understand if changes in the unemployment rate are driven because of a change in the number of jobs, or the number of people seeking jobs. The data for November, as mentioned, caught the market by surprise on the positive side. Consensus expectations are less exuberant than last time, with 16.5K jobs created during December.

Technicals

The AUD/USD has had some trouble gaining momentum for a retracement back to last year’s highs after bouncing off the 0.7050 three times in a row. It didn’t even make it back to the first Fibo level. Conversely, it seems to be in the process of forming another downward trend channel with the same amplitude and angle as the channel it followed down last year:

We still have support at 0.7050, but will it hold again? On the other hand, if it makes another run higher, then we have resistance at 0.7450.