Tomorrow’s employment set could prove to be a volatile affair for Australian markets, as it could be seen as a proxy for how soon or how many times RBA are to cut in this cycle, depending on the unemployment rate.
RBA cut rates to a historical low at their June meeting and, whilst the statement remained fairly neutral, Lowe commented later that the RBA could lower rates similar to UK or Canada ‘if we have to’. He also reiterated what the statement highlighted; the RBA are closely watching employment data, adding that the RBA expects inflation to rise if unemployment can lower to 4.5%. That could be a big ask, given unemployment rose to an 8-month high in May. Therefore, it could go without saying that unemployment is the key metric to watch in tomorrow’s employment report.
According to the ASX30 day interbank cash rate futures, markets are pricing in a 50% chance of an RBA cut in July. We’d expect this to pick up materially if unemployment were to rise to 5.3% or above. That said, expectations work both ways, so a steady or lower unemployment rate tomorrow would likely be bullish for AUD/USD (at least over the near-term). Furthermore, markets are also pricing in around 113% chance of a cut in September, and over 100% chance of two cuts by May 2020. Of course, with so much certainty of further easing already priced in by markets, it leaves the potential for quite a bullish bounce if data improves whilst the Fed looks to ease themselves.
