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Time To Back An Aussie Interest Rate Rise?

Posted on: 19 November 2018 , by: Darren Sinden , category: Market Review

Contrarian: Improving Macro Data May Mean a Change of Heart at The RBA and A Rally in AUDUSD

The Australian dollar has been trying its best to improve against its US counterpart during  November. There’s no denying that its year-to-date performance of -7.30% has acted as an anchor on a more significant upward move. However, sentiment towards the Aussie may be changing. 

Recent macroeconomic data has had a better feel to it. For example, unemployment has been falling whilst job creation rates have been rising; a sure sign of an improving economy, and a tightening labour market. We can see these two employment metrics in the chart below. 

Australian unemployment rate vs Australian employment change

Unemployment for October is running ahead of forecast at 5.0%; its lowest levels since April 2012 and 32,800 new jobs were created in the country last month. Even though thye have been resistant to change in the first half of 2018, wages in Australia are beginning to pick up in the second half of the year. In Q3 the wage price index rose by +2.3% YoY which has been its fastest growth rate in four years and up from a low point +1.9% YoY in late 2016. Both public and private sector wages grew strongly but the public sector took the lead with YoY growth of +2.5%.

There are approximately 1.987 million public sector employees who make up 15.6% (12.67 million) of the total workforce and they are an important and influential demographic in these matters. Economists at HSBC recently highlighted that in the private sector, 16 out of the 18 industry categories in Australia had shown Q3 wage growth at higher levels than a year ago. HSBC also noted that some states have unemployment levels that are well below the national figure. Helping to bolster the idea that the -0.30% fall in unemployment in September was not just a flash in the pan. The state by state unemployment breakdown can be seen below.  

State unemployment change

In another sign that the Australian economy is performing strongly, the balance of trade data has shown a steadily growing trade surplus, which came in at AUD 3.02 billion in September.  What's more, the August figure was also revised higher, suggesting that Australia can continue to thrive even if global growth expectations for 2019 are being revised lower. Don't forget that Australia has not been in recession for more than 25 years.

Reservations

The RBA or Reserve Bank of Australia has been reluctant to raise interest rates or to even signal that this is a possibility because of its concerns about household finances and economic growth in the country. However, the improving macroeconomic backdrop may now provide them with a reason to think again. Central banks rarely reverse course over short time frames (the last move in Australian rates was downward) and even those in the market who sense that a change in policy is possible also think it’s unlikely that interest rates will rise before the end of Q2 2019. That may sound like a long way off but in reality, it’s just over seven months away. 

Remember that markets are forward thinking, that is they price into the future. So a price you see today is reflecting expectations six months ahead or more. That means that a change in sentiment about the timing of an RBA interest rate rise will affect the value of the Australian dollar in the present. Nor is it necessary for the central bank to change course because if enough market participants come to believe this is likely, prices will adjust to reflect that belief.

AUD vs USD Daily chart

RBA Minutes

At the time of writing, the Aussie dollar has added +2.83% versus its US rival month to date. In the daily chart above it has met with resistance at 0.73 and before that at 0.7315 towards the end of September. But crucially from my point of view, the Aussie has broken above the downtrend line that dates back to early June and found tentative support around 0.7164, that coincided with the 20-day EMA line shown in turquoise above. There is more established support at 0.7054 which, in recent weeks, has also been an attractive entry point on the long side in AUDUSD. Tuesday will see the release of the latest set of RBA minutes (the record of the banks most recent interest rate meeting). 

The question is, will they reveal a thawing in the bank's interest rate outlook? If the market likes what it hears, then we could see a retest of 0.73/0.7315. If a move to and through these levels can be sustained, then the high from August 9th of 0.7453 would be a deeper target. It may be that we don't see these moves this week. However, the idea that RBA attitudes towards rate rises can and will change certainly seems to be gathering momentum and should continue to do so while we remain above 0.7054.  

 

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