Writing here 24 hours ago about the upcoming economic data in Australia, we said, “The AUD is unlikely to react well to any number which falls shy of expectations”. Well, the numbers were below consensus forecasts and the Aussie Dollar got trashed; falling against every major currency in the world and most of the Emerging Markets ones too. AUD/USD tumbled to a low of 0.7575with AUD/NZD at one point below 1.10 for the first time since October 18th.
We said yesterday, “the risks [for the Wage Price Index] appear very moderately skewed to the downside” but in the event a big miss threw rate hike hopes/expectations completely out of the water. The RBA last week said it wanted to see, “how much wage growth will pick up in response to improved labour market conditions and the associated reduction in spare capacity”. The simple answer from Wednesday’s numbers is “not very much”. This isn’t a specific criticism of the RBA; they are merely guilty of the group-think which has afflicted Central Banks worldwide.
The Bank of England and the US Federal Reserve cling grimly on to their models which show that lower unemployment should lead to higher wages. Instead of seeking to explain why it hasn’t happened, they merely reiterate a strongly held belief that it eventually will. It’s quite possible that today’s employment report will show continued job gains. It may even bring a very modest bounce for the AUD. The one thing it won’t do, however, is shift the dial higher on interest rate expectations. Rallies in the Aussie Dollar still seem very likely to be met with heavy offshore selling. Indeed, on a jobs number less than the +18k consensus, a rally won’t even happen.