Jobless data adds to bull case for recovery
Sarah Turner

A shock improvement in Australian unemployment triggered a sharp surge in the value of the currency, as traders wondered if the data is the first sign of a stronger economic recovery, lending further credence to the suggestion the recession is already over.

The economy created 111,000 new jobs last month, pushing the jobless rate down to 6.8 per cent from 7.5 per cent in July, surprising market economists who had been expecting August’s rate to rise to 7.7 per cent.

The Australian dollar jumped to a session high of US73.12¢ before retreating to US72.58¢ amid growing gloom in global markets linked to the Federal Reserve’s policy outlook, released earlier on Thursday AEST.

“The data should be taken as a positive for the Australian dollar,” said Sean Callow, senior currency strategist at Westpac. “It fits the case for the third quarter being a clear positive for GDP.”

Mr Callow is open to upgrading his Australia dollar forecasts for an improving domestic economy, but said next week’s retail sales would have to be positive.

He would also want to see improving unemployment data for another month before considering such a move. “We would want more evidence of an upside.”

Kimberley Mundy, currency strategist at Commonwealth Bank, expressed some doubt about the underlying strength of the unemployment data, saying it masked factors such as a very small increase – of 0.1 per cent – in hours worked. “That’s not a strong demand factor.”

Similarly, Rodrigo Catril at National Australia Bank said many of the jobs that outperformed expectations over the month came from a “strange number of sole traders” and questioned if that signalled “a rise in the gig economy”.

Strategists and economists also fret about the reduction in government support measures, due to take place later this month, and the potential for the removal of these measures to disrupt growth and lift unemployment.

But external factors are likely to play a greater role for the Australian dollar than domestic factors, in the short term at least.

“If we can get a more positive global economic backdrop and the US dollar comes under more pressure then there’s a good chance we have another go at US74¢ later this month,” said Westpac’s Mr Callow.

Still, Thursday “is not the right day to start an Australian dollar rally,” the strategist said, with the currency “swamped by the bad mood across Asia”.

Equity markets were a sea of red, with the S&P/ASX 200 Index falling 72.9 points, or 1.2 per cent, to 5883.2 points, and US stock futures sharply lower in the Asian session ahead of Wall Street’s open.

The US dollar hit a five-week high with the US Dollar Index climbing to 93.48. The US Federal Reserve wasn’t as dovish as some in the market had expected at its two-day monetary policy meeting.

“Overall activity remains well below its level before the pandemic and the path ahead remains highly uncertain,” Fed chairman Jerome Powell said.

The Fed upgraded its 2020 GDP forecast to a 3.7 per cent contraction from negative 6.5 per cent but made slight downward revisions to its 2021 and 2022 forecasts. Updated “dot plots” showed a majority of committee members expected the Fed funds rate to remain on hold until at least the end of 2023.

Neither the Fed nor the Reserve Bank of Australia are expected to introduce policies that significantly change the interest rate differential attractiveness of the US dollar against the Australian dollar for some years, noted Ms Mundy.

Interest rate differentials and commodity prices are the main drivers for the Australian dollar, she said, and given that Chinese steel demand remains robust “our forecast is higher by the end of the year” for the Australian dollar. CBA is pencilling in a US75¢ exchange rate by the end of 2020.

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