Australian employment data is expected to show signs of slowing during the month of April, as the net employment change is forecasted to rise by only 10,000 while the unemployment rate is anticipated to hold at 4.1 percent. Previously, tight labor market conditions fueled resilient consumption growth throughout 2007, but in the first quarter of 2008 retail sales (excluding inflation) fell 0.1 percent. In fact, RBA Governor Glenn Stevens noted in his monetary policy statement on May 6 that “(i)n order to reduce inflation over time, growth in aggregate demand needs to be significantly slower than it was in 2007. Evidence is accumulating that this is occurring.” On the other hand, “(t)he rise in Australia’s terms of trade currently occurring...will add substantially to national income and ability to spend, even with the slowing in global growth to below trend pace that the Bank has been assuming for some months now.” 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 remain heavy as traders judge that the RBA remains hawkish. Upcoming data could lead AGBs up from a break of 93.70 towards the 93.80 level as labor market growth is expected to slow, suggesting that domestic demand could wane. On the other hand, if Australian equity markets continue to gain, AGBs could ease lower toward 93.60.

FX – AUD/USD

The AUD/USD pair remains extremely strong, 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 April, and if the data is particularly disappointing, AUD/USD could reverse from its test of 0.9500 toward near-term support at 0.9195. On the other hand, a surprisingly strong employment change figure could help propel the pair above 0.9400/15. Furthermore, as Technical Strategist Jamie Saettele noted in his Daily Technicals, “Longer term, the AUDUSD is in the process of forming a major multi year top but that top is not confirmed yet. We view the advance from the 2001 low as an A-B-C advance. The rally from the 2004 low at .6771 is wave C. The rally through the November 2007 high at .9400 satisfies minimum expectations for wave 5 of C from .8512. The longer term implications are that a multi-year top will form (possibly has already formed) and the AUDUSD will decline significantly.” As a result, there is still some upside potential available for AUD/USD, with trendline resistance looming above at 0.9576.

Equities – S&P/ASX 200

While the S&P/ASX 200 has recovered nearly 38.2 percent 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. Given the recent surge in commodity prices, mining firms have led equity markets in commodity producing regions like Australia and Canada. However, the 100 SMA and Fibonacci resistance at the 5,730 level capped the most recent rally in the S&P/ASX 200, and with Australian labor market conditions anticipated to slow, the index could continue to ease toward 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. On the other hand, continued commodities strength and a better-than-expected employment report could propel the index through near-term resistance to target 5,900.

Terri Belkas is a Currency Strategist at FXCM.