AUD/USD: Trading the Change in Australian Employment

Trading the News: Australia Employment Change

What’s Expected
Time of release:        11/11/2009 00:30 GMT, 19:30 EST
Primary Pair Impact :    AUDUSD
Expected:         -10.0K
Previous:         40.6K

Impact the Australia Employment Change has had on AUDUSD over the last 2 months

September 2009 Australia Employment Change

The Australian labor market unexpectedly improved in September, with the economy adding 40.6K jobs from the previous month and leading the annual rate of unemployment to fall to 5.7% from 5.8% in August. A deeper look at the report showed full-time positions increased 35.4K after falling 30.5K in September, with part-time jobs contributing a rise of 5.2K, and the data reinforces an improved outlook for future growth as the $1T economy skirts the global recession. As policy makers anticipate the isle-nation to expand further going into the following year, the Reserve Bank of Australia may continue to raise borrowing costs over the coming months after unexpectedly raising the cash rate by 25bp to 3.25% in October, and the central bank may turn increasingly hawkish going forward as the expansion in fiscal and monetary policy continues to stimulate economic activity.

August 2009 Australia Employment Change

Australian employment tumbled 27.1K in August amid expectations for a 15.0K decline, while the annual rate of unemployment held steady at 5.8 for the third month as discouraged workers left the labor force, and households may continue to face headwinds over the coming months as the government stimulus begins to taper off. The breakdown of the report showed full-time positions plunged 30.8K, while part-time jobs increased 3.8K from the previous month, and firms may continue to lower their temperament to retain workers in an effort to weather the slump in global trade. Nevertheless, as the $1T economy continues to skirt the global recession and expands 0.6% in the second-quarter, RBA Governor Glenn Stevens said that borrowing costs will need to rise from the “emergency” level, and speculation for a rate hike is likely to support the appreciation in the exchange rate throughout the second-half of the year.

What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

Bullish Scenario: If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the AUD against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on AUDUSD ahead of the data release.

Bearish Scenario: If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the AUD against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on AUDUSD ahead of the data release.

How To Trade This Event Risk

The Australian dollar could face increased selling pressures over the next 24 hours of trading as economists forecast employment to fall 10.0K in October, and the slump in the labor market is likely to hamper the outlook for private spending as households continue to face tightened credit conditions paired with fading labor demands. A report by the Australia & New Zealand banking Group showed job advertisements fell 1.7% in October to mark the first decline in three-months, while employment opportunities were 44.9% lower from the previous year, and businesses may continue to keep a lid on production and employment as global trade conditions remain subdued. Moreover, the Westpac consumer confidence survey weakened for the first time in sixth months, with the index falling 2.5% in October, while retail sales unexpectedly slipped 0.2% in September, and data reinforces a weakened outlook for discretionary spending as households ramp up their rate of savings in the second-half of the year. At the same time, the NAB business confidence index climbed to 16 in November from 14 in the previous month to mark the highest reading in nearly six years, with the employment component rising into positive territory for the first time since August 2008, and firms may look to increase their labor force over the coming months as policy makers hold an improved outlook for future growth. The Reserve Bank of Australia tightened policy for the second consecutive month in November and expects economic activity to expand three-times faster than it had initially forecasted in August as the board projects GDP to increase at an annual pace of 1.75% this year and 3.25% in 2010. Moreover, the central bank held an improved outlook for global trade and sees “growth in business investment and exports” strengthening going forward and expects the terms of trade to pick up “over the next year or two.” In addition, Treasury Wayne Swan pledged to maintain the government stimulus in an effort to avoid “higher unemployment,” and went onto say “fiscal and monetary policy are working together” to encourage a sustainable recovery within the region. As the central bank raises its economic outlook for the region, with Deputy Governor Ric Battellino expecting to see an “extending period of prosperity in the years ahead,” the RBA may continue to tight policy going forward, and long-term expectations for higher borrowing costs is likely to drive the exchange rate higher as investors weigh the outlook for future policy.

At first glance, trading the given event risk favors a bearish outlook for the Australian dollar as market participants anticipant the labor market to weaken in October but nevertheless, the unexpected rise in employment during the previous month has left the door open for an upward surprise. Therefore, if the economy continues to buck the global trend and adds10.0K jobs or more from the previous month, we will look for a green, five-minute candle following the release to confirm a buy entry on two-lots of AUD/USD. Once these conditions are met, we will set our initial stop at the nearby swing low or a reasonable distance, and this risk will establish our first target. Our second objective will be based on discretion, and we will move the stop on the second lot to breakeven as soon as the first trade trades its target in order to preserve our profits.

In contrast, the downturn in job advertisements paired with the ongoing slump in global trade may lead businesses to scale back on employment in an effort to reduce costs, and a rise in job losses are likely to weigh on the outlook for private spending as households increase their temperament to save. As a result, if employment falls 10.K or greater in October, we will favor a bearish outlook for the Australian dollar, and will follow the same setup for a short aussie-dollar trade as the long position discussed above, just in reverse.

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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com