
Australia’s unemployment rate hit its lowest level since August 2008, helping drive the country’s dollar, commonly referred to as the Aussie, sharply higher.
Data released by the Australian Bureau of Statistics on Thursday showed that the unemployment rate in February 2022 fell to 4% as the country added 77,000 more jobs.
As a result, the Aussie gained 0.72% against the US dollar, with the AUD/USD exchange rate climbing to 0.7338. While the Reserve Bank of Australia (RBA) has so far been dovish and highlighted that it can stay patient when it comes to raising interest rates, the latest data shows that one of its stated goals – full employment – is now even closer.
Heading towards full employment
“The further decline in the Australian unemployment rate takes the labour market closer to full employment, setting the RBA up to hike rates in June,” said Ben Udy, economist for Australia and New Zealand at Capital Economics.
“RBA Governor [Philip] Lowe has made clear his desire for Australia to achieve full employment. While the RBA has recently downplayed measures of the natural rate of unemployment, it previously estimated that full employment would be reached at an unemployment rate of 4.0%. The Bank had expected it to take until the middle of this year for unemployment to get there. The faster tightening in the labour market should boost wage growth in the years ahead and we reiterate our forecast that the Bank will hike rates in June, earlier than most anticipate,” he added.
Similarly, economists at ING also said that the RBA will have a lot more to think about with the latest labour force data.
Labour market strength
“The unemployment rate fell too and is now only 4%, equalling the record low of 2008. Something for the RBA to mull while it clings on to its dovish stance,” the Dutch bank said in a note.
In fact, the strength of the labour force data suggests that the unemployment rate may even fall to multi-decade lows later this year, surpassing the RBA’s expectations, according to some economists.
“If participation does not rise as expect and the projected employment growth is achieved then we will see a much lower unemployment rate that the 3.8% forecast,” said Justin Smirk, senior economist at Westpac. “It is also possible that if participation does not rise as expected, firms may not be able to attract workers that are suitable to their needs and hence the lack of supply could be brake on stronger employment growth.
What is your sentiment on AUD/USD?
“If this was to happen we could still see the expected 3.8% low in unemployment even with softer than expected growth in employment.”
Defying US interest rate hike
Further upside for the Aussie comes in the form of the return of the risk-on environment with the US Federal Reserve’s Federal Open Market Committee raising interest rates by 25 basis points and kicking off the cycle of monetary tightening.
According to Shane Oliver, head of investment strategy and chief economist at AMP Capital, unlike in usual times, the Aussie is likely to continue gaining despite the possibility of US interest rates rising faster than Australian rates.
“While a decline in the short-term interest rate gap between Australia and the US normally puts downwards pressure on the value of the AUD this is likely to be more than offset by strong commodity prices, which is being accentuated by the war in Ukraine. As a result, unless there is a global recession, we continue to see the AUD rising over the next year,” he said in a note.