AUD Employment Change (DEC) (01:30 GMT; 19:30 EST)
Expected: 20.0K
Previous: 52.6K

AUD Unemployment Rate (DEC) (01:30 GMT; 19:30 EST)
Expected: 4.4%
Previous: 4.5%

What Are The Markets Facing?

Australian employment data is expected to improve during the month of December, as the net employment change is forecasted to rise by 20,000 to pull the unemployment rate down to 4.5 percent. Consumption has proven to be highly resilient, as retail sales for the month of November were stronger than expected as the labor market has already taken on additional workers for 13 consecutive months. While the unemployment rate has actually risen to 4.5 percent last month from a low of 4.2 percent, this was primarily the result of a surge in the participation rate as Australians come back into the market looking for positions. Meanwhile, a lack of availability of skilled workers at mining companies creates the potential for faster wage growth, which the Reserve Bank of Australia will see as a threat to price stability. With CPI expected to rise above 3.0 percent during the first half of 2008, it’s no wonder the central bank holds such a hawkish bias. In fact, in the policy statement from the RBA’s December meeting, Governor Glenn Stevens noted that “recent information continues to indicate strength in demand and output in Australia, with the economy having relatively little surplus capacity.” While the Board remained “concerned about the outlook for inflation,” increased “uncertainty about the international outlook and the local trends in wholesale borrowing costs” left the RBA to judge that “the current stance of monetary policy should be maintained for the time being.” Though the global outlook for growth remains uncertain, credit conditions have improved which may leave the RBA more comfortable considering rate hikes. Furthermore, while the bank does not meet again until February 5 and data released before that time may indicate changing conditions, a surprisingly strong improvement will lead the markets to aggressively ramp up expectations of further monetary policy tightening at that meeting.

Bonds – 10-Year Australian Government Bond Futures

Australian government bonds have continued to rally from support near the 93.89 level, but they could be in for declines if Australian labor market data proves to be stronger than expected. Indeed, with the RBA already concerned about building inflation pressures, signs that consumption growth is accelerating will lead traders to ramp up speculation that the bank will raise rates in February. On the other hand, if Australian equity markets continue to tumble, the subsequent risk aversion could lift AGBs through 94.06 towards 94.17.

FX – AUD/USD

As a commodity currency, it has been interesting to see that the rapid ascent of gold prices hasn’t had a bigger impact on the Australian dollar. Nevertheless, AUD/USD appears to be picking up pace to target the 0.9000 level once again, and the pair could possibly target 0.9600 or even rally to parity with the US dollar. Looking at upcoming event risk, the release of Australian labor market data could propel AUD/USD higher as the figure is expected to improve, and if the employment change is actually stronger-than-expected, the rally could be sharp as the markets may ramp up speculation that the RBA will move to hike rates in February while most other central banks are reducing interest rates or at least considering cutting rates. On the other hand, a disappointing employment report could weigh on AUD/USD, with a break below 0.8682 negating the bullish bias for the pair.

Equities – S&P/ASX 200 Index

The S&P/ASX 200 has tumbled quite a bit since running into resistance at the confluence of the 38.2 percent fib of 5,483.30 – 6,851.50 and the 200 SMA at 6,328/30. However, the index has run into support at the 76.4 percent fib and a falling trendline near 5,800. The release of Australian labor market data could give equities a bit of a short-term boost, but with risk aversion remaining one of the primary drivers of stock and fixed income market price action, the overwhelming trend (down) may hold. The next major level of support looms at 5,500, which also happens to be a psychologically important level and should prevent further declines in the near-term.

Terri Belkas is a Currency Strategist at FXCM.