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AUD/USD: Trading the Change in Australian Employment

AUD/USD: Trading the Change in Australian Employment

2010-03-09 19:25:00
David Song;Michael Wright,
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Trading the News: Australia Employment Change

What’s Expected
Time of release:        03/11/2010 00:30 GMT, 19:30 EST
Primary Pair Impact :    AUD/USD
Expected:         15.0K
Previous:         52.7K

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

03.09_TTN1

January 2010 Australia Employment Change

Businesses in Australia expanded their labor force in more than three years, with employment increasing 52.7K in January from a revised 37.5K rise in the previous month. The data spurred speculation that the Reserve Bank of Australia will continue to tighten policy this year in order to prevent a surge in wages feeding into inflation on the back of the biggest hiring boom in five years. As a result, the unemployment rate slid to an annualized pace of 5.3% from 5.5% in February, the Statistics Bureau said in Sydney today. Taking a closer look at the report, full-time jobs added 15.9K, while part time employment jumped 39.9K to lead the rise. Going forward, the rise in interest rate expectations could continue to drive the exchange rate higher over the coming months, but we may see the RBA adopt a neutral policy stance over the near-term as the central bank aims to encourage a sustainable recovery. 03.09_TTN2

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. 03.09_TTN3

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.
00001_AUD 00002_AUD

How To Trade This Event Risk

The labor market in Australia is expected to improve for the sixth consecutive month in February, with economists forecasting employment to expand 15.0K in February, and the data could drive the exchange rate higher as market participants speculate the Reserve Bank of Australia to normalize policy further over the coming months. The 4Q GDP report showed economic activity expanded 0.9% during the last three-months of 2009 to mark the fastest pace of growth since the first-quarter of 2008, and conditions are likely to improve going forward as the government stimulus continues to feed through the real economy. Moreover, business investments jumped 5.5% during the same period, with household spending advancing 1.1%, while consumer prices increased at an annual pace of 2.1% to top expectations for a 2.0% rise. As the outlook for growth and inflation improves, market participants speculate the RBA to hike the benchmark interest rate to pre-crisis levels as the central bank aims to balance the risks for the $1T economy.

The RBA raised the cash rate by 25bp earlier this month to 4.00% as borrowing costs “remain lower than average,” and said growth will likely “be close to trend and inflation close to the target over the coming year” as the economy skirts the global downturn. As a result, Governor Glenn Stevens said that the interest rate should be “closer to average” and noted that the March rate decision “is a further step in that process,” and went onto say that “labor-market data and a range of business surveys suggest growth in economy may have already been at or close to trend for a few months.” At the same time, the central bank head argued “credit conditions remain difficult in some major countries” as the banking industry remains weak, and said “concerns regarding some sovereigns remain elevated” as global policy makers took unprecedented steps to support the world economy. However, as economic conditions improve, the rebound in employment is likely to lead the central bank to tighten policy further over the coming months as the recovery gathers momentum.

Trading the given event risk favors a bullish outlook for the Australian dollar as market participants expect labor conditions to improve for the sixth month in February, and price action following the data could set the stage for a long aussie-dollar trade. Therefore, if employment increases 15.0K or greater from the previous month, we will need to see a green, five-minute candle following the release to confirm a buy entry on two-lots of AUD/USD. Once these conditions are fulfilled, we will place the initial stop at the nearby swing low or a  reasonable distance, and this risk will establish our initial target. The 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.

In contrast, a dismal employment report could lead investors to scale back expectations for a rate hike as the RBA monitors the impact of the rate hikes, and a pull back in labor demands is likely to weigh on the exchange rate as market participants weigh the outlook for future growth. As a result, if employment holds steady or contracts from the previous month, we will favor a bearish outlook for the Australian currency, and will follow the same strategy for a short aussie-dollar trade as the long position laid out above, just in reverse.

03.09_TTN4

Questions? Comments? Join us in the DailyFX Forum

To discuss this report contact David Song, Currency Analyst: instructor@dailyfx.com

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