Aussie dollar rally hits jobs speedbump

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This was published 7 years ago

Aussie dollar rally hits jobs speedbump

By Timothy Moore
Updated

The Australian dollar rallied hard following a cautious Federal Reserve that signalled no pick-up in the pace of US rate hikes, but the currency's rise was stalled by weaker than expected local employment data.

The Aussie jumped nearly 2 per cent to a three-week high of US77.20¢ after the Fed lifted rates early Thursday morning but stuck to its outlook for monetary tightening this year.

But the currency dipped more than a quarter of a US cent after a disappointing jobs report showed the jobless rate ticked up to 5.9 per cent in February, from 5.7 per cent, as employment fell 6400 against a forecast rise of 16,000. In late trade the Aussie was fetching US76.76¢, still more than a cent higher than Wednesday late afternoon.

"It is hard to ignore the highest unemployment rate since January last year, so it was a logical pullback for the Aussie," said Westpac senior currency strategist Sean Callow. "It reinforces the view that the Reserve Bank is on hold, but if there is any change, the risk for rates is on the downside."

The Aussie rallied 8 per cent from mid May to late last month, topping US80¢, but it has apparently run out of upward momentum for now.

The Aussie rallied 8 per cent from mid May to late last month, topping US80¢, but it has apparently run out of upward momentum for now.Credit: Bloomberg

The labour market is a concern for the RBA as jobs growth has been slowing in recent months, with more part-time jobs created than full-time ones.

Market bets of a rate hike by the end of the year have fallen sharply over the past days, from a 50-50 chance seen late last week to a one-in-four probability.

"This should challenge market pricing of an RBA tightening cycle by year-end, particularly if further macroprudential steps are taken," said Morgan Stanley analyst Daniel Blake.

Still, the Aussie stood tall largely due to heavy US dollar selling overnight after the Fed disappointed bulls with a less aggressive rate hike projection than they had wagered on.

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Federal Reserve policymakers said they still see US rates rising two more times this year, with another three increases in 2018. That's what they tipped in December.

In comments after the Fed's latest policy decision, chair Janet Yellen reiterated that monetary policy would remain easy for some time yet, reining in recent market bets of an accelerated rate hike path.

"Given current valuation levels we really needed something new in order for the (US dollar) to re-discover its mojo, and the changes in the statement and in Yellen's comments fell well short of expectations," wrote Daniel Been, head of FX research at ANZ.

The local currency also advanced against a range of other currencies, rising around 1 per cent against the euro, the pound and the New Zealand dollar.

The Fed now appears to track for a June and then a December hike, according to Stephen Halmarick, chief economist at Colonial First State Global Asset Management. "We see the move by the Fed to raise interest rates so early in 2017 as signalling a new, more active, phase of monetary policy."

Mr Halmarick said he's forecasting three hikes in total for 2017, 2018 and 2019 with rates peaking between 2.5 per cent and 2.75 per cent, before two rate cuts in 2020 to offset slower economic growth in the US.

"We expect a stronger US economy in 2018-2019 (when the bulk of the fiscal stimulus will impact) that will see inflation, interest rates, bond yields and the US dollar move higher," Mr Halmarick said. "This collective tightening of financial conditions is expected to lead to a slowing in the pace of economic growth from around 2020, and see the Fed attempt to offset some of this impact via monetary policy easing."

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The greenback then appears poised to retrace some of its recent rally.

"The absence of any overt hawkish guidance from the Fed and their dots should leave the (US dollar) trading on the back foot over the next month," said Westpac's Richard Franulovich, with history suggesting that the yen will absorb most of the initial impact though the Aussie, Kiwi, Loonie and other Asian currencies to feel a "more lasting effect".

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