Employment Change (JUL) (21:30 ET; 01:30 GMT)
Expected: 25K
Previous: 2.5K

Unemployment Rate (JUL) (21:30 ET; 01:30 GMT)
Expected: 4.4%
Previous: 4.3%

How Will The Markets React?

The Australian labor market is anticipated to improve even further in July, as the employment change is estimated to rise 25,000, in line with the Reserve Bank of Australia’s policy statement which noted that, “Capacity utilization is high after a lengthy period of expansion, and unemployment over recent months has continued to decline.” However, the official unemployment rate may be distorted by new rules introduced on July 1 by the government, as the welfare-to-work program could potentially add as many as 90,000 people to the labor force from the beginning of July. Naturally, it will take time for these new entrants to find jobs, so this will likely result in a large jump in the participation rate and pushed the unemployment rate as high as 4.9 percent, though median estimates are pinned at 4.4 percent. Given the variance in estimates, any figure may serve as a surprise to the markets and could lead to a spike in volatility throughout the asset classes.

Bonds – 10-Year Australian Government Bond Futures

Prices on 10-year Australian government bond futures plummeted as the RBA hiked to an 11-year high of 6.50 percent, as yields surged. However, declines were stopped short at support at the 93.93 level, and given the large amount of volatility that could occur in the next trading session amidst the scheduled event risk, the contracts could resume their uptrend. However, the data at hand could prove to be bearish for Australian government bonds, as labor market conditions are anticipated to improve, which could help push prices below the 93.90 level. Traders should also remain aware of risk aversion trends as well, as global bond markets tend to move in unison.

FX – AUD/USD

The RBA’s rate hike to 6.50 percent had little impact on AUD/USD, though we did see the pair break above the 0.8600 level throughout the following US session. While the pair could easily fall back into range, upcoming economic data may warrant a move by AUD/USD up to the 50% fib of 0.8867 – 0.8445 at 0.8660, as labor market conditions are anticipated to tighten further. However, the unemployment rate could actually surge, despite the employment gains, as the start of the Australian government’s welfare-to-work program will add thousands of people to the labor supply, few of which are likely to find jobs immediately. While this information is already available to the markets, traders may be initially surprised by a jump in the unemployment rate, and subsequently sell the Aussie in response. However, if the data actually does confirm a positive employment change, markets should eventually recognize the distortion in the unemployment rate and AUD/USD could find a bid tone shortly after.

Equities – ASX 200 Index

The S&P/ASX 200 rallied the most since March from support at the 200 SMA, despite a rate hike by the RBA, as the central bank’s policy statement focused more on strong economic growth rather than inflation. The Australian equity index could target 6,145 next, as the July labor market report is anticipated to show an improvement, signaling that consumption should continue to keep pace. However, there may be a spike in volatility upon release, as the official employment report may be distorted and could show a surge in the unemployment rate to as high as 4.9 percent from 4.3 percent. If traders fail to look into the details to find that conditions in the labor market remain favorable, the S&P/ASX 200 could fall sub-6,000 once again.

Terri Belkas is a Currency Strategist at FXCM.