FX Flash
Group Economics Macro & Financial Markets Research
14 July 2016
Strength in the AUD not sustainable AUD gains after full time jobs surge
Roy Teo
Strength in AUD to complicate rebalancing in the economy
Senior FX Strategist Tel: +65 6597 8616 roy.teo@sg.abnamro.com
Fade the recovery in the AUD force 000 3mth avg (lhs) Change in labor
AUD gains after full time jobs surge Optimism in the Australian dollar (AUD) gained momentum this morning after the Australian economy added 38.4k full time jobs in June (2.5k revised upwards in May) according to figures from the Australia Bureau of Statistics. While there are some encouraging signs that the outlook for full time jobs is improving, we like to highlight that in the first half of 2016, the economy shed 19k full time jobs. This is still very weak compared to 74k added in the first six months and 109.5k in the second half of 2015 respectively. The ABS also reported that hours worked by employed people declined and the hours worked in 2016 have not increased. In conclusion we expect wage growth to remain subdued and hence inflation to remain weak. Full time jobs recovering; remain weak ‘000
Strength in AUD to weigh on economy rebalancing %
50 40 30 20 10 0 -10 -20 -30 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Change in full time jobs '000 3mth avg
Reverse scale %
15 10 5 0 -5 -10 Jan-10
Change in labor force '000 3mth avg
Source: ABS
-20 -15 -10 -5 0 5 10 15 20 25 30 Jan-12
Jan-14
Exports services YoY% (lhs)
Jan-16 AUD TWI YoY%(rhs)
Source: RBA, ABS
Strength in AUD to complicate rebalancing in the economy As policy makers seek to rebalance the economy from the mining to non-mining sectors, the strength in the AUD is likely to complicate the process. With monetary policies in the advanced economies likely to be looser for longer, carry trades are likely to support the
Insights.abnamro.nl/en
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FX Flash - Strength in the AUD not sustainable - 14 July 2016
AUD. The AUD trade weighted index is more than 2% stronger since the RBA last cut the OCR by 25bp in early May and have surged by more than 5% since June. While business confidence is recovering, consumer confidence in July has declined to the lowest level since April this year. In addition, core inflation in the second quarter (27 July) is likely to remain below 2%. Fade the recovery in the AUD The trend is your friend. The latter suggests potentially more upside in the AUD in the short term. Nevertheless, we favour fading the recovery in the AUD towards this year’s peak of around 0.78. Financial markets are too complacent, pricing in only 50% and 78% probability that the RBA will cut the OCR in August and by the end of this year respectively. We expect the AUD to decline to around 0.72 in the coming months before recovering to around 0.74 by the end of this year.
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FX Flash - Strength in the AUD not sustainable - 14 July 2016