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MT5.com - AUD/USD: scars of the Australian economy and Nonfarm expectations

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Forex Analysis:::2020-08-07

AUD/USD: scars of the Australian economy and Nonfarm expectations

The quarterly report of the Reserve Bank of Australia was published during the Asian session on Friday, which turned out to be very dovish. It put pressure on the Australian dollar: the aussie retreated from the highs it won against the US dollar and returned to the 71st figure. By and large, today's release once again reminded traders of the existing problems in the labor market.

You should take note that the members of the RBA have remained surprisingly optimistic for several months, stating that the coronavirus strike was weaker relative to earlier forecasts. However, members of the central bank were not so optimistic at the last August meeting. The latest report detailed the concerns of RBA officials.

First of all, the RBA warned that judging by the dynamics of recent events, the Australian labor market will need more time to recover from the recession. At the same time, the central bank released new forecasts, which were more pessimistic about the May estimates.

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In particular, now the RBA expects a 10 percent unemployment rate by the end of this year. In its May statement, the central bank spoke of a maximum 9 percent level. In addition, the RBA expects the economy to contract by 6% this year. This is in line with the May forecast - but now the report says that "the recovery will be slightly slower than previously predicted." Wage growth has been lowered, with growth expected to be at a record low of 1.25% this year and next. But household expenditures, according to the updated estimates of the RBA, will not slow down as much as previously assumed - the regulator revised its forecasts from -9% to -7%. Meanwhile, business investment expectations have significantly deteriorated. According to the RBA, this figure will decrease by 17% this year (instead of the previously expected reduction by 13%).

After this report was released, RBA Assistant Governor Luci Ellis made a comment on the main thesis. According to her, the coronavirus crisis "left deep scars" on the country's economy, despite the fact that the worst scenario of all possible was not implemented in the country. These scars, according to Ellis, will affect even the personal relationships of Australians: due to problems in the labor market, fewer people will marry and/or move to their partners.

As for the updated forecasts, the RBA representative explained that the situation in Victoria played a key role here. Let me remind you that this is one of the largest states in the country where an outbreak of coronavirus was recently recorded. After that, the region was effectively closed for quarantine, and a curfew was even imposed in five million people in Melbourne. According to Ellis, the current situation will slow down the growth of the economy in September and in the third quarter as a whole.

The representative of the RBA also focused on the uneven recovery of the labor market. RBA Governor Philip Lowe also drew attention to this fact at the end of the August meeting. He noted that the growth in the number of employees is primarily due to part-time employment, while full-time employment shows a negative trend. This fact will have a negative impact on salaries (full-time positions assume higher salaries), and, accordingly, on the consumer activity of employees. It should be added here that the incomes of many Australian families will decrease from the autumn for another reason: the government's JobKeeper assistance program will be significantly changed (in particular, subsidies will be paid at a reduced rate and according to stricter criteria).

Thus, the RBA report really turned out to be very pessimistic. The essence of it is that the recovery of the Australian economy (and especially the labor market) will be slower than previously expected.

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In response to this release, the Australian dollar retreated from the resistance level of 0.7250, which it reached yesterday due to the greenback's weakness. Today, traders of the AUD/AUD pair will also be focusing on American events. The Nonfarm Payrolls report will be released at the beginning of the US session on Friday, and a little later the epic will continue with the discussion of a new aid package for the US economy.

The intrigue remains in both cases. According to the consensus forecast, Nonfarm data should reflect the further recovery of the US labor market: July unemployment should fall to 10%, and the number of people employed in the nonfarm sector should rise by 1.5 million. But an extremely weak report from ADP was published on Wednesday, which is considered a harbinger of an official report. According to their data, the number of people employed in July increased by only 167,000. If today's release similarly disappoints investors, the greenback will come under pressure again, and the AUD/USD pair could return to the 0.7250 resistance level. Otherwise, it will be difficult for buyers to leave the boundaries of the 71st figure.

As for events in the US Congress, the situation is unpredictable: according to representatives of Republicans and Democrats, they have reached the finish line in the issue of agreeing on a new aid package. But they have been voicing similar rhetoric for the second week, so the intrigue persists here. The dollar will receive strong support if the Republican bill is accepted, which will pull AUD/USD to the bottom of the 70th figure.

Therefore, you are advised to make trading decisions on the pair after the US labor market data has been released: the pair will either rise to the resistance of 0.7250, or fall to the bottom of the 71st figure with a possible testing of the 70th price level.

Irina Manzenko
Analyst InstaForex
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