AUD/USD probing 0.7300 to the downside after labour market data endorses dovish RBA view

• AUD/USD has gone sideways around 0.7300 in recent trade amid subdued conditions.
• Weak labour market data does not seem to be weighing on the Aussie too badly.

AUD/USD trading conditions have been calm since the start of the European session, with the pair swinging either side of the 0.7300 level over the last few hours. The pair is currently trading with on the day losses of about 0.5%, having slipped from above 0.7320 during Asia Pacific trading hours in a continuation of the downside it has been experiencing since Wednesday. To recap, the pair was sent tumbling from the upper-0.7300s in wake of a much hotter than expected US Consumer Price Inflation report that has pumped expectations for the Fed to start hiking interest rates sooner in 2022, and probably also to accelerate the pace of its QE taper at the start of next year.

Some market commentators cited the downbeat October labour market report released by the Australian Bureau of Statistics during Asia Pacific hours as a negative that weighed on the Aussie. The economy unexpectedly shed nearly 50K jobs on the month versus forecasts for a 50K employment gain and the unemployment rate spiked more than expected to 5.2% from 4.6% in September (versus an expected rise to 4.8%). But the weakness being experienced by AUD/USD is more a function of USD strength rather than localised Aussie weakness, with NZD and CAD experiencing even worse on the day losses versus the buck.

If the AUD/USD can break more convincingly below the 0.7300 level in the coming session, there is very little by way of notable support levels ahead of 0.7200. The most notable downside levels include the 29 September low at 0.7170 and then the August low at just above 0.7100.

Labour market to improve in November

According to MUFG, “the worsening of labour market conditions in October despite the easing of restrictions reflects in part the timing of the survey reference period that ended on 9 October”, prior to significant re-opening in New South Wales after 11 October and the start of re-opening in Victoria from 21 October. “As a result”, continues the bank “the November employment report should show a significant improvement in labour market conditions”. Credit Agricole add to this that “payrolls data suggest strong jobs growth in the second half of October; after lockdowns were eased”. Expectations for a November rebound in the labour market could thus be one reason why AUD is not underperforming its fellow risk/commodity-sensitive G10 peers on Thursday.

However, analysts broadly agreed that the weak labour market data, for now, endorses the RBA’s dovish message of no rates hikes into 2023. Furthermore, Credit Agricole expects that next week’s Australian wage data will likely also reinforce the RBA’s view. In terms of the outlook for the Aussie, MUFG are bearish; they think that 1) AUD STIR market pricing for 75bps of hikes in 2022 is excessive and the Fed will tigthten faster than the RBA, 2) the Aussie is likely to be exposed to the ongoing growth slowdown in China (which property sector woes are likely to worsen), 3) the Aussie is vulnerable to weakness in iron ore prices, which continue to fall back to pre-Covid-19 levels. “We expect AUD/USD to re-test key support at the 0.7200-level in the near-term”, concludes MUFG.