Australia’s employment data for July will hit the markets at 01:30 GMT on Thursday, following on from the Reserve Bank of Australia’s (RBA) meeting minutes on Tuesday. The economy is going through a very difficult period and is experiencing the biggest contraction since 1930. Consequently, the RBA’s board has reaffirmed its pledge not to increase the cash rate until progress is made towards full employment. Nevertheless, the aussie continues to move higher against the US dollar but may soon need a boost for stronger bullish movements.
Labour market conditions are still bad
In July, unemployment rate jumped to 7.5%, which was the highest jobless rate since November 1998, due to the COVID-19 pandemic. August’s prediction is for the unemployment rate to tick even higher to 7.8%, while the net change in employment is expected to show that the economy added only 40K jobs compared to 114.7K in July. Furthermore, the participation rate is forecasted to decrease to 64.4% from 64.7% previously. The slowdown is likely related to the lockdown in the state of Victoria.
The AIG manufacturing index fell to 49.3 in August, declining into contraction territory after expanding for two months amid a new wave of coronavirus cases, while the services index fell to 43.5 versus 44 in the prior month. The latest release points to the ninth consecutive contraction in the services sector and at a faster pace than in July as new coronavirus restrictions in Melbourne weighted heavily on business activity in Victoria and other states.
RBA minutes: recovery is uneven after Victoria’s reopening
The RBA interest rate decision on September 1 maintained the targets for the cash rate and the yield on 3-year Australian Government bonds at 25 basis points. The Bank had also decided to increase the size of the Term Funding Facility and make the facility available for longer. In the minutes of that meeting released early on Tuesday, the Board noted that the downturn had not been as acute as earlier expected and a recovery was underway in most of Australia. However, the recovery was likely to be uneven, with the COVID-19 outbreak in Victoria having a major effect on the economy.
Members referred that the first half of 2020 had seen the largest contraction in global economic activity in many decades. Some countries had experienced contractions of around 20% in the first half of the year, although the decline in output in Australia was expected to have been less severe.
Will the aussie keep on an uptrend?
Aussie/dollar moved slightly higher after the RBA meeting minutes, rebounding on the 20-day simple moving average (SMA) as expectations of further easing in the near term diminished. But the price could be at risk of a bearish retracement if the employment report disappoints again. Price action is likely to challenge again the 0.7200 handle, ahead of the 0.7067 support. A leg below it could send prices lower until the 23.6% Fibonacci retracement level of the up leg from 0.5506 to 0.7412 at 0.6858.
Alternatively, upbeat numbers on employment are likely to propel the price higher towards the two-year high of 0.7412 before meeting the 0.7490 resistance, registered on July 2018, shifting the outlook to strongly bullish.
Overall, aussie/dollar is gaining some momentum in the near term, while a climb above 0.7412 could add optimism for buying interest.