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The Australian dollar is stable after the employment data in a risk environment. Will AUD/USD rally?

Australian Dollar, AUD/USD, Jobs, Unemployment, RBA, USD – Talking Points

  • The Aussie dollar held steady after jobs data was broadly in line
  • Today’s data comes amid a strong national economic outlook
  • RBAs are validated to raise rates. Will more hiking stimulate AUD/USD?

The Australian dollar held firm after the April unemployment rate came in at 3.9% as expected and from 4.0% previously. This is the lowest Australian unemployment rate since the 1970s.

The overall employment change for the month was 4,000 instead of the expected 30,000. Full-time employment rose by 92,000, while part-time jobs fell by 88,000.

With inflation uncomfortably high, today’s figure clears the way for the RBA to continue raising rates and potentially accelerate the lifting cycle to curb loose policy. However, domestic factors seem to be set aside for the exchange rate for now.

The Aussie was battered overnight in a classic risk-free trading environment after the reality of a sharp global monetary tightening became apparent to a seemingly complacent stock market.

When it comes to growth versus inflation, central banks have erred on the side of promoting growth at the expense of living with high inflation. This was born out of the high inflation period of the 1970s-80s.

Around this time, US Federal Reserve Chairman Paul Volker won the support of two successive administrations, from both sides of the aisle, to bring inflation under control. It did this through several very restrictive policies. One of them was very high interest rates.

The cost of this policy was two severe recessions in the 1980s. The market seems to have realized this harsh reality for the current situation. The cheap money of that era is being consigned to history at a rapid pace.

As central banks focus on fighting inflation, risky assets that rely on cheap funding are now seeing their economic models challenged.

As an example, Special Purpose Acquisition Companies (SPACs), once the darlings of the recent free money environment, are facing challenges in raising funds – if they can.

Of more concern has been the recent disappointing report the results of companies in the real economy in the United States.

Against this backdrop, growth-linked currencies like the Aussie are under pressure, while safe-haven currencies like the US dollar, Japanese yen and Swiss franc are attracting inflows.

Movements in the USD Index (DXY) appear to be driving AUD/USD at the moment.

Chart vscreated in TradingView

— Written by Daniel McCarthy, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @DanMcCathyFX on Twitter

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