AUD Employment Change (MAR) (01:30 GMT; 09:30 EDT)
Expected: 10.0K
Previous: 36.7K

Employment Change (MAR) (01:30 GMT; 09:30 EDT)
Expected: 4.1%
Previous: 4.0%

What Are the Markets Facing?

Australian employment data is expected to show signs of deterioration during the month of March, as the net employment change is forecasted to rise by only 10,000 while the unemployment rate is anticipated to tick up to 4.1 percent. Previously, tight labor market conditions fueled resilient consumption growth throughout 2007, but in the early months of 2008 retail sales have fallen negative. In fact, RBA Governor Glenn Stevens noted in his monetary policy statement on March 4 that there is “tentative evidence that some moderation in household demand is beginning to occur, with business and consumer sentiment softer recently, and household credit demand slowing somewhat.” However, Stevens also said that “a significant slowing in demand from its pace of last year is likely to be necessary to reduce inflation over time.” As a result, if the next round of Australian employment data suggests that consumption is likely to weaken further, the news will reduce the chances that the RBA will raise rates again this year. However, it will take a significant drop in price pressures before the central bank will even consider cutting rates.

Nevertheless, this particular indicator tends to be a big short-term market-mover, especially for the forex markets, since the employment change is rarely released exactly in line with expectations. As a result, traders should keep an eye on the news wires, as a stronger-than-expected figure could spark volatility and a bout of bullish sentiment on the Australian economy. On the other hand, surprisingly soft data will only add to the RBA’s suspicions that domestic demand is easing.

Bonds – 10-Year Australian Government Bond Futures

Australian government bonds ran headlong into resistance at the 94.20 level, which has capped similar rallies over the course of 2007. Indeed, the contract remains heavy as traders judge that the RBA remains hawkish. Upcoming data could lead AGBs up towards the 93.90 level as import growth is expected to slow, suggesting that domestic demand is waning. On the other hand, if Australian equity markets continue to gain, AGBs could ease lower toward 93.70.

FX – AUD/USD

The AUD/USD pair remains strong since bouncing from 100 SMA support a few weeks ago, buoyed by rebound in commodity prices. While broad risk trends will likely remain the primary driver of the Aussie given its high yield, upcoming economic data could shake AUD/USD up. Australian labor market conditions are anticipated to deteriorate in March, and if the data is particularly disappointing, AUD/USD could reverse from its test of 0.9300 toward near-term support at 0.9195. On the other hand, a surprisingly strong employment change figure could help propel the pair above 0.9300. Nevertheless, as Technical Strategist Jamie Saettele noted in his Daily Technicals, “We are treating the decline from .9470 (which was a truncation) as a series of 1st and 2nd waves. This bearish count remains valid as long as price is below .9353. The sharp drop from just below .9300 presents a shorting opportunity against .9353.”

Equities – S&P/ASX 200

While the S&P/ASX 200 has recovered somewhat since tumbling from the November 2007 highs to a low of 5,039.60, fears that a possible US recession and a credit crunch will impair the global financial markets could remain a stress on the index. Now that the Federal Reserve has enacted a total of 300bps in rate cuts since last September, equity markets in the Asia-Pacific region have stabilized as a sigh of relief. However, Fibonacci resistance at the 5,650 level capped the most recent rally, and with Australian labor market conditions anticipated to narrow, the index could continue to ease toward near-term support at 5,500. Furthermore, a return to risk aversion market-wide could send the index down to ultimately tumble back to the March lows.

Terri Belkas is a Currency Strategist at FXCM.