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By Chris Tedder, Research Analyst, Forex.com

Australia’s unemployment rate jumped to its highest level in 12 years during July, causing the Australian dollar to plummet during the Asia session. The unemployment rate unexpectedly jumped to 6.4% from 6.0% (expected 6.0%), and while this is likely to weigh on the Australian dollar, it’s unlikely to push the RBA to cut the official cash rate.

Most of the slide in the unemployment rate can be explained by an increase in the workforce, with the participation rate jumping to 64.8% from 64.7%, and by the loss of 14.8K part-time jobs. The good news is that most of the losses in part-time employment were covered by a 14.5K increase in full-time employment. This also brings to light the divergence between most forward looking indicators for the labour market and the headline unemployment rate, which suggests that the unemployment rate may have peaked in July.

From a monetary policy perspective, the RBA has been expecting the unemployment rate to increase, thus July’s figures shouldn’t scare the bank. Although, we need to see at least one more employment report to better assess the longevity of Australia’s labour market. Slight weakness is to be expected as the economy transitions away from mining investment, but if the already accommodative stance of monetary policy proves ineffective in spurring growth in non-resource parts of the economy, then the RBA may be forced to do more. Yet, this looks unlikely at this stage given the mild threat of a bubble in house prices and the relaxed attitude of the RBA towards limited weakness in the economy.

Furthermore, assuming all else is equal, the more depressed the labour market is, the longer it will take the RBA to normalise monetary policy. This is pushing back the market’s expectations of tighter interest rates, thereby making the Australian dollar less attractive. As AUD weakness it lessens the probability that the RBA will provide extra stimulus, thus the overall effect of today’s report is only mildly negative for monetary policy and not alarming enough to support further interest rate cuts.

One to watch: EURAUD

EURAUD is going to be an interesting pair to watch in the near-term. Today’s disappointing Australian jobs report sent the pair rocketing towards trend line resistance. A break here could see the pair make a run for longer-term trend line resistance and then its 200-day SMA (see chart). A positive divergence between RSI and price looks promising, but we haven’t entered bullish territory yet. In any event, it may all come down to tonight’s policy meeting at the ECB.

 

Source: Forex.com