AUD Employment Change (JAN) (00:30 GMT; 19:30 EST)
Expected: 15.0K
Previous: 20.1K

Unemployment Rate (JAN) (00:30 GMT; 19:30 EST)
Expected: 4.3%
Previous: 4.3%

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 15,000 to keep the unemployment rate steady at 4.3 percent. Consumption has proven to be highly resilient, as retail sales for the fourth quarter were stronger than expected as the labor market has already taken on additional workers for 14 consecutive months. Meanwhile, a lack of availability of skilled workers at mining companies creates the potential for faster wage growth, which the Reserve Bank of Australia sees as a threat to price stability. With CPI expected to hold above 3.0 percent during the first half of 2008, it’s no wonder the central bank holds such a hawkish bias. In fact, the RBA hiked rates by 25bp to an 11-year high of 7.00 percent on February 5. Domestically, the RBA suggests that previous policy tightening actions “can be expected to exert a moderating influence on private demand in Australia over the period ahead,” though the bank is still considered to hold a hawkish bias, as Governor Stevens also said, “given the extent of pressure on capacity and the build up in inflation, a significant slowing in demand from its recent pace is likely to be necessary to reduce inflation over time.” With the support of newly elected Prime Minister, Kevin Rudd, who recently said, “(a)s a government, we believe the fight against inflation must come first,” the RBA is highly unlikely to turn to a more neutral policy stance until CPI figures start to fall lower. Furthermore, if the January labor market reports points to upside inflation risks, the markets may continue to price in additional monetary policy tightening by the RBA this year.

Bonds – 10-Year Australian Government Bond Futures

Australian Government Bonds continue to look bearish after the RBA raised rates last week, and upcoming labor market data is expected to reflect a rise in employment that may worsen the nation’s labor shortage that is stoking inflation and giving the RBA more reason to raise rates. AGB’s have continued to drop through technical levels, and has moved down to test the 76.4% retracement level of 93.58-94.20 at 93.728. However, a stronger than expected employment number could weigh on AGBs further to send price towards the December 2007 low at 93.58, though 93.66 may be a more realistic target.

FX – AUD/USD

With the RBA already sounding hawkish after their most recent rate hike, as inflation remains above the high end of the bank’s comfort zone at 3.8 percent, the latest Australian employment data is eagerly awaited. Based on a Bloomberg News survey of 24 economists, the data is anticipated to show that employers hired 15,000 workers after taking on an extra 20,100 in December, which is expected to keep the unemployment rate at 4.3 percent. With global growth expectations sinking, the Australian dollar remains sensitive given the economy’s strong dependence on exports of natural resources, as trade contributes 17 percent to GDP. However, with commodity prices remaining strong and tight labor markets creating the potential wage gains, inflation control will likely remain the RBA’s main focus in the near-term. As a result, a better-than-expected net employment change may help propel AUD/USD towards 0.9100.

Equities – S&P/ASX 200 Index

The S&P/ASX 200 Index continues to consolidate above support at 5,500 as investors weigh the impact of a US economic slowdown and RBA rate hikes on Australia’s robust economy. The January employment report is expected to show a gain of 15,000 jobs, which may give the index a short term boost, as the strong labor market has fueled retail sales and demonstrates the economy’s resilience. On the other hand, a weaker than expected number may signal that the rate hikes are beginning to have their intended effect of slowing down the economy , which could drive the ASX 200 downward below support towards 5,200.

Terri Belkas is a Currency Strategist at FXCM.