Aussie gives back gains as pressure on RBA to cut rates mounts

Summary:

• Australian jobs report produced another solid numbers

• AUD trades lower as NAB pushes up mortgage rates citing a sustained increase in funding costs

• Pound benefits from upbeat remarks from EU leaders regarding a possible delay to the UK’s exit from the block

Under rate cut pressure

The next Reserve Bank of Australia meeting is scheduled on February 5 and it will be preceded by the inflation data on January 30. Therefore, one may suppose that Australian policymakers could be confused when they take notice of latest mortgage rate increases made by the biggest Australian banks. Today, such a decision was taken by the National Australia Bank (NAB) which chose to lift mortgage rates by 12 to 16 basis points citing “a sustained increase in funding costs”. This decision is viewed by market participants as the message sent to the RBA to consider a rate decrease aimed at easing country’s lenders. Indeed, the market-based rate cut probability rose (by the year-end) rose to almost 42% this morning from below 35% on Wednesday. It happened despite another solid jobs report we were offered from Australia overnight.

Growth of full-time employees has slowed down lately. The underemployment rate remains relatively elevated. Source: Macrobond, XTB Research

On the surface, the December Australian labour market report could be classified as another success as firms hired 21.6k employees. On top of that, the November’s value was revised up to 39k from 37k. The unemployment rate unexpectedly fell to 5% from 5.1%. In short, these numbers surprised to the upside but as usual the devil is in the details. Looking into the data it turns out that the release is not so impressive as it seems. First and foremost, growth in employment was steered solely by part-time employees (24.6k) while full-time employment decreased 3k. The revisions made to the November’s release also pointed to such a scenario (more gains came from part-time jobs). Moreover, looking at the annual pace of jobs creation, showed at the charts above, one may notice that full-time employment has stalled of late unlike part-time jobs. In turn, the underemployment rate, reflecting people who want a full-time job, has barely changed since the start of 2016 in spite of the fact the jobless rate has fallen one percentage point. It stresses that the Australian labour market may still lack a sufficient qualitative improvement. Finally, a decline in the unemployment rate was fully offset by a decrease in the labour force participation rate which moved down to 65.6% from 65.7%. It suggests that lower unemployment in December was mainly due to labour force shrinkage.

After the Aussie failed to break above 0.7235, the pair resumed its downtrend. From this standpoints one may assume that a move toward 0.7040 could be in the offing. Source: xStation5

Brexit delay

The British pound smashed the resistance at 1.30 on Wednesday and continued climbing being steered mainly by the US dollar weakness. However, it got some reassuring information in the afternoon as senior figures in the French and German governments said that they would be open to extending the Brexit deadline. Taking into account that the Labour Party is likely to support this plan and avoid a no-deal scenario one may suspect the deadline, set initially on March 29, will be pushed back. The deadline might be extended even until the summer. We pointed that it could be supportive of the British pound and this scenario appears to be materializing. The pound is trading subtly below 1.3070 at the time of writing being flat on the day.

The pound is pushing higher with 1.33 being the first more notable target for bulls. Source: xStation5

In the other news:

• Australian preliminary PMIs for January: manufacturing rose to 54.3 from 53, services fell to 51 from 52.7, composite fell to 51.5 from 52.9

• Japan’s manufacturing PMI for January shrank to 50 from 52.5, ending the longest expansionary run for over a decade

• API showed crude inventories rose 6.55 million barrels last week, gasoline stockpiles rose 3.64 million barrels