Monthly Economic Review: Australian Dollar

Now that February is almost over, it’s time for us to have a quick rundown of the reports released so far this month. In this edition of my Monthly Economic Review, I’ll be focusing on the Australian dollar.

Employment

Australia’s January jobs report indicated that employment conditions have weakened significantly, as the country saw its jobless rate surge from 6.1% to 6.4% – its highest level in 13 years. Hiring fell by 12.2K during the month, worse than the projected 4.7K decline, spurred mostly by a sharp downturn in full-time employment.

Components of the report indicated that labor force participation failed to show an improvement during the period, as the participation rate didn’t budge at 64.8%. While this shows that Australians aren’t exactly giving up on their job hunt just yet, it also indicates that hiring prospects haven’t been strong enough to encourage those who’ve exited the labor force to resume looking for work. According to ANZ, job advertisements picked up by only 1.3% in January, lower than the previous month’s 1.8% gain.

Spending

With these bleak jobs readings, it’s no surprise that Australia also saw a weak round of consumer spending figures. Retail sales printed a mere 0.2% uptick for the December shopping season, following the teeny 0.1% increase logged in for the previous month. On a larger scale, business spending has also been particularly weak, as the latest private capital expenditure report indicated a worse-than-expected 2.2% slide for Q4 2014.

On a brighter note, spending in the housing sector could see some green shoots. Home loans surged by 2.7% in December, higher than the projected 2.3% increase, while construction work done for Q4 showed a smaller-than-expected 0.2% drop versus the estimated 1.2% decline.

Trade Activity

Australia’s latest trade figures also looked promising, with the country’s trade deficit shrinking from 1.02 billion AUD to 0.44 billion AUD in December. Underlying data reveals that exports rose by 1%, as AUD depreciation boosted demand for the country’s shipments, while imports fell by roughly the same amount.

At that time, China had been printing downbeat business reports, with its official manufacturing and non-manufacturing PMI readings indicating industry contraction. Since China is Australia’s BFF in terms of trade activity, a downturn in Chinese business conditions usually translates to lower demand for Australia’s raw material exports.

Towards the end of this month though, China reported a potential rebound in its manufacturing industry, as the HSBC flash manufacturing PMI climbed from 49.7 to 50.1. This suggests that Australia might see a stronger pickup in trade activity later on.

RBA Monetary Policy Bias

Given the global downturn in inflation and potentially weaker employment conditions for the Land Down Under, RBA Governor Stevens and his gang of policymakers decided to stick to a dovish bias. In fact, they announced a 0.25% interest rate cut earlier in the month and shared a downbeat outlook for the Australian economy.

Minutes of their policy meeting indicated that further cuts are likely if economic conditions worsen, but RBA officials hinted that they might wait for the impact of their recent move to kick in before making more policy adjustments. This led forex market participants to price in lower odds of another rate cut for the RBA meeting in March, although some still believe that the central bank will ease again in April or May.