Aussie dollar jumps as the chance of another cut from the RBA halves

The RBA has been waiting to see some improvement in the economy and this came this morning. Even if it was ever so slight.

A slight improvement in unemployment this morning was enough for the market to dramatically reduce the chance of another rate cut from the Reserve Bank in November.

The seasonally adjusted rate dropped 0.1 per cent to 5.2 per cent in September.

And with the central bank boss Philip Lowe citing employment as a main indicator for recent reductions in rates, he is now heavily favoured to leave the rate at 0.75 per cent on Melbourne Cup day.

The vote of confidence for the Reserve Bank’s perceived position was good news for the Australian dollar, which spiked immediately after the Australian Bureau of Statistics data was released.

Australian unemployment rate ticks down from 5.26% to 5.20%, sparks a bounce in A$ as bets on RBA Nov cut are slashed from around 40% to 20% chance. Overall jobs growth still curiously very strong at 2.5%yr, well ahead of GDP growth (cf US NFP growth 1.4%yr) pic.twitter.com/HbkOyTZCmP

— Sean Callow (@seandcallow) October 17, 2019

The chance of the rate falling to 0.5 per cent next month halved from about 40 per cent to about 20 per cent.

The improvement in figures surprised most economists, leading to the Aussie dollar rising as much as 0.5 per cent higher to be buying 67.90 US cents and was worth 67.86 at 1200 AEDT.

“The RBA made it very clear their priority at the moment is not so much inflation as it is the labour market and particularly the unemployment rate,” Westpac senior currency strategist Sean Callow told news.com.au.

“In May or June they were talking about wanting to get the unemployment rate down to about 4.5 per cent and that would help boost wages growth.

“That’s about the only way they think they can get the inflation back on track. They just need to have a stronger labour market.”

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When explaining the decision to cut the rate earlier this month to below 1 per cent for the first time in history, Dr Lowe cited the weak jobs market.

“The board took the decision to lower interest rates further today to support employment and income growth and to provide greater confidence that inflation will be consistent with the medium-term target,” he said.

“The economy still has spare capacity, and lower interest rates will help make inroads into that.

“It is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target.”

The number of employed persons rose by a net 14,700 to 12.93 million during the month, according to the ABS, with a 26,200 increase in people with full-time work and an 11,400 decrease in people with part-time work.

The participation rate fell from 66.2 per cent to 66.1 per cent.

Capital Economics senior Australia, Japan and New Zealand economist Marcel Thieliant said the central bank would be relieved, but the jobless rate would soon rise again.

It rose to 5.3 per cent from 5.2 per cent in August.

“Employment surveys point to jobs growth slowing to around 2 per cent by early next year, and falling job vacancies suggest the slowdown could be even more pronounced,” Mr Thieliant said.

“While job advertisements haven’t fallen much further in recent months, they still point to an unemployment rate of around 5.5 per cent.”

That is well above the RBA’s 4.5 per cent target, which Mr Thieliant suggested meant further rate cuts were still needed.

“We reiterate our forecast that the unemployment rate will climb to 5.5 per cent by early next year and expect the RBA to cut interest rates to 0.5 per cent in December,” he said.

“And as inflation falls further below target, we think it will follow up with another cut to 0.25 per cent by early next year and will eventually launch quantitative easing.”

BIS Oxford Economics chief economist Sarah Hunter says the challenging outlook for the residential construction and retail sectors suggests some people may be formally dropping out of the labour force because they can’t find a suitable position.

“Looking ahead, the data broadly confirms that while jobs growth remains robust employment needs to rise further before we will see a takeoff in wages,” she said in a note.

“RBA are very likely to cut the cash rate again in the near future, and it will raise pressure on the Government to use fiscal policy to stimulate the economy and accelerate the return to full employment.”

— with AAP

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