AUD/USD: Labor Miss Derails Bull Train

The recent rally in AUD/USD was stopped abruptly today, due to a surprising decline in employment numbers for the month of August. Headline Employment Change fell by 10.8K versus an expected increase of 10.0K, driving unemployment rate up from 5.7% to 5.8%.

This increase in the unemployment rate came in spite of a fall in the participation rate from 65.1% to 65.0%, with the diagnosis likely that many Australians are unable to find jobs and have simply given up. This is not the usual diagnosis as the participation rate is never static, with slight volatility generally expected. But when we couple this together with the falling employment number, such an assertion becomes more reasonable. This is not a good sign for Australia’s economy, and suggests that the slowdown in the economy is continuing.

Hourly Chart
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This is definitely bearish for the Aussie dollar, but the post announcement reaction is much more than what we ordinarily expect from disappointing economic news. Certainly the disappointment is huge, ranking 8th in terms of under-expectation when we compare monthly data since 2007. However, it seems that there are many other factors at play as well.

Technical bears come straight to mind, with prices likely being depressed further with traders playing the Channel Breakout which is further fueled when prices push below 0.928 soft support. As the recent rally has a huge element of short squeezing, it is possible that traders who are still bearish in the long-run saw this as an opportunity to re-enter as a sign that the short squeeze is over.

Technically, Stochastic readings are at their most Oversold in recent weeks, but readings are not yet reversing, suggesting that the current bearish momentum may yet continue. It is possible prices may find support around 0.9225 – 0.923 the short consolidation region found on 9th September. If price continues to stay under 0.928 despite the rebound, we could see further bearish moves lower during the remainder of the week.

Weekly Chart
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The Weekly chart is bearish again with price trading back within the consolidation zone, which opens up the Channel Bottom as a viable bearish target. However, as the week has not yet ended, we should avoid getting ahead of ourselves and risk false moves. A more conservative method would be to wait for Monday’s reaction should prices close below the 0.93 ceiling for the week. If early Monday action is heavily bearish, the probability of price hitting a consolidation floor of 0.89 increases greatly.

With Fed expected to introduce QE tapering measures in 2013 and stopping stimulus in 2014, the USD is slated to strengthen further. This will add additional downside pressure for the already beleaguered AUD. However, should the FOMC meeting next week not result in the introduction of the 1st tapering action, the USD may suddenly weaken in the short-term which may send prices above 0.93.

However, that doesn’t change the dynamics of the AUD, which is still looking bearish. Hence traders who may wish to avoid USD volatility may wish to explore other crosses. AUD/NZD immediately comes to mind and may be a good alternative especially given that RBNZ has just suggested that rate hikes will be coming in 2014.

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