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Australian Dollar Volatility to Continue on RBA, US Jobs Data

Australian Dollar Volatility to Continue on RBA, US Jobs Data

Ilya Spivak,

Fundamental Forecast for the Australian Dollar: Neutral

  • Aussie Dollar fireworks ahead on RBA rate decision, US jobs data
  • Near-even split on RBA rate cut bets poised to make for volatility
  • Firm US wage growth may boost Fed hike chances, hurting Aussie

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The Australian Dollar looks set for another volatile week following the latest fireworks on the back of soft first-quarter CPI figures as another round of high-profile event risk comes across the wires. On the domestic front, the RBA monetary policy announcement is in focus. Externally, all eyes will be on April’s US Employment figures.

Investors have become increasingly convinced that an RBA rate cut is at hand. The priced-in probability of a 25 basis point reduction in the cash rate now stands at 57 percent. This makes markets the most convinced of on-coming easing in six months. Still, the two sides of the argument are far enough apart that a sizable contingent of market participants will need to readjust portfolios whatever the outcome, stoking volatility.

Australian economic data has increasingly deteriorated relative to consensus forecasts over recent months, beckoning greater policy support. The RBA has looked on dismissively however, maintaining that there is no urgency to cut further even as soft price growth creates scope to do so. With narrowly better-than-even odds of a move now baked in, a decision to keep the current policy setting may trigger a more violent reaction than the alternative.

Turning to the US, analysts expect a 200k increase in nonfarm payrolls in April – a mild slowdown from the 215k added in March – while the jobless rate holds steady at 5 percent. Equally of note, average hourly earnings are expected to rise at a year-on-year rate of 2.4 percent, making for the first wage inflation increase in four months.

The report will almost certainly prove pivotal for Fed policy expectations after the central bank conspicuously played down global risks in last week’s policy statement (as we expected), refocusing attention on domestic matters. A payrolls print in the vicinity of the trend average (230k) seems unlikely to stir traders’ passions. Wages data may prove more potent however.

While the Fed has made steady progress on the employment side of its mandate, nailing down price growth has proved tricky. The pace of wage expansion is critical here because a steady pickup would signal rising structural inflation pressure, a welcome sign that the underlying trend is heading in the right direction independently of flighty oil- and FX-inspired price swings.

With that in mind, a firm weekly earnings print is likely to boost June rate hike probabilities and lift the US Dollar while weighing on risk-sensitive assets including the Aussie. A soft result portends the opposite dynamic.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.