AUD/USD: Trading the Change in Australian Employment

Trading the News: Australia Employment Change

What’s Expected
Time of release:        02/11/2010 00:30 GMT, 19:30 EST
Primary Pair Impact :    AUD/USD
Expected:         15.0K
Previous:         35.2K

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

December 2009 Australia Employment Change

The Australian labor market unexpectedly improved in September, with the economy adding 35.2K jobs from the previous month and leading the annual rate of unemployment to fall to 5.5% from a downward revision of 5.65 the previous month, with economists’ expectations of 5.8%, marking the fourth straight month that the reading has rallied. Taking a closer look at the breakdown of the report, employers added 135,700 jobs in the four months through December in which 58% of the jobs were full-time positions, with the reading gaining 7,300, while part-time employment rose by 27,900, the report illustrated. Indeed, retail sales leapt 1.4% in November from October on the back of rising consumer confidence as surging employment data boosts buoyancy that the economy is in its recovery phase, and RBA is expected to raise their cash target rate by 25 basis points to 4.00% at their next policy meeting on March 1st.

November 2009 Australia Employment Change

Australian employment change unexpectedly leapt for the third straight month, with the number of people employed gaining 31.2K in November from an upward revision of 27.2K in October amid expectations of 5.0K, as companies added six more jobs than previously forecasted, the statistics bureau stated today. The breakdown of the report illustrated that the number of full-time jobs added 30.8K during November, while part-time employment rose by 300, the report displayed. The employment change pushed higher for the month and is expected to rally in the near future as consumer demand rises as Prime Minister Keven Rudd’s government distributed more than A$20 billion in cash to households, and is prompting airlines and retailers to boost hiring. Meanwhile, the participation rate fell to 65.2% during the month from a revised 65.3%, and the central bank is widely expected to raise interest rates 25 basis points at its next rate decision meeting.

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 labor market is expected to improve for the fifth consecutive month in January, with economists forecasting employment to increase 15.0K from the previous month, and the data could drive the exchange rate higher as the isle-nation skirts the global recession. However, the annual rate of unemployment is anticipated to rise to 5.6% from 5.5% in December as discouraged workers return to the labor force, and the release could spark mixed reactions in the currency market as investors weigh the outlook for global growth. A report by the Department of Education, Employment and Workplace Relations showed vacancies for skilled positions advanced 1.1% in January after rising a revised 1.6% in the previous month, while the AiG Performance of Construction index jumped to 57.7 during the same period from 49.3 to mark the fastest pace of growth since 2008. Moreover, building approvals unexpectedly increased 2.2% in December after surging 10.4% in the previous month, and conditions are likely to improve going forward as the expansion in monetary and fiscal policy continues to feed through the real economy.

However, the NAB business confidence index weakened to 8 from 19 in December, with retail spending unexpectedly contracting 0.7% during the final month of 2009, and firms may keep a lid on production and employment over the coming months as the government in China, Australia’s biggest trading partner, aims to temper the marked recovery in the region. Nevertheless, the Reserve Bank of Australia surprised the markets by keeping the benchmark interest rate steady at 3.75% earlier this month, but said borrow costs are “likely” to reach 4.50% by the end of the 2010 as the central bank raises  its outlook for growth and inflation. In addition, the RBA said that “unemployment rate has peaked at around 5.75%” amid an initial forecast for an 8.5% clip, but saw a risk  for a slower expansion in economic activity as “the effects of the temporary stimulus fade.” As a result, policy makers argued that “a substantially stronger pick-up in private demands” will be need to foster a sustainable recovery, and went onto say “growth outside of the mining sector is expected to be only modest, reflecting the reallocation of productivity resources within the economy.”

Expectations for a rise in employment favors a bullish outlook for the Australian dollar as the central bank raises its forecasts for growth and inflation, and price action following the release could set the stage for a long aussie-dollar trade as market participants speculate the RBA to tighten policy further over the course of the year. Therefore, if the economy adds 15.0K or more jobs in January, we will need to see a green, five-minute candle following the data to confirm a buy entry on two-lots of AUD/USD. Once these conditions are fulfilled, we will set the 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 once the first trade hits its mark in order to preserve our profits.

On the other hand, the slump in domestic consumption paired with tightening credit conditions may lead businesses to keep a lid on employment, and a dismal labor report is likely to weigh on the exchange rate as the government stimulus begins to taper off. As a result, if job fail to grow from the previous month or unexpectedly contract in January, 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 laid out above, just in reverse.

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