Australian Employment Preview: Improvement in the sector, but support needed for years to come

• Australia is expected to have lost 125K job positions in May.
• Wages’ growth has continued to slow significantly in the first quarter of the year.
• AUD/USD is still bullish and could retake the 0.7000 threshold.

Australia will release May employment data this Thursday, and the country is expected to have lost 125K job positions, an “improvement” from the previous -594.3K. The unemployment rate is foreseen ticking higher to 7% from 6.2% in April, while the participation rate is foreseen at 63.7%.

As it happens worldwide, dismal employment figures are the result of the strict lockdown measures imposed to prevent the spread of the coronavirus pandemic that continues to take its toll. Between April and May, most major economies have been almost paralyzed, resuming economic activity in June. With that in mind, speculative interest won’t be much impressed with the poor figures.

Wages falling further

Australia publishes wage growth quarterly basis and apart from the monthly employment report. According to the latest available data, the Wage Growth Price Index rose by 2.1% in the first quarter of 2020, and when compared to the first quarter of 2019. That’s below the annual average of 2.2% for the five years to December 2018. In the five years to December 2013, the average annual growth was 3.3%. Salaries have been slowing significantly, in spite of the RBA’s valiant efforts.

Even further, the Melbourne Institute estimated that annual pay growth has fallen into negative territory for the first time in over 20 years, as total pay growth over the year to June 2020 was -0.7%.

According to a special document prepared by the Parliament of Australia, “the major causes of the slowdown in wage growth cited by both the Reserve Bank of Australia (RBA) and Treasury include the presence of excess capacity in the labor market (demonstrated by stubbornly high rates of underemployment); a steady decline in inflation and inflationary expectations; and a decline in the terms of trade since the end of the mining boom.”

RBA says the economy will need support for some time

The Reserve Bank of Australia has released the Minutes of its latest meeting earlier this week. Policymakers agreed that the target for the three-year yields would be maintained until progress is made towards the bank’s goals of full employment and the inflation target. The same applies to the cash rate, which will remain at record lows until the bank sees progress on employment and inflation. The outlook is highly uncertain, according to the document, and the effects of the coronavirus pandemic on the economy will likely be long-lasting.

Australia has had a limited number of contagions and deaths and seems to have COVID-19 under control, but that was not for free.  The Q1 GDP has shown that the country’s economy contracted by 0.3%, the first time within recession levels in almost 30 years. And it barely measures the beginning of the crisis. Q2 figures are expected to paint a much worse picture. In this scenario, and keeping in mind the developments over the last few years, a pick-up in the employment sector is far from sight.

 AUD/USD possible scenarios

After collapsing in Mach, the AUD/USD pair has been in bullish mode, topping at 0.7063 last week. The pullback from the level has been quite limited, mostly because of the RBA’s confident stance on economic recovery. Now trading around 0.6800, the long-term picture suggests that bears are still side-lined. The broad dollar’s weakness reinforces the technical picture.

Upbeat numbers will likely boost the pair towards the critical 0.7000 threshold, although gains beyond this last may be short-lived.  A slump on a disappointing outcome could see the pair falling towards 0.6830 first, and to the 0.6770 price zone later, where bulls are expected to take their chances. A bearish extension below this last will be possible if dismal numbers couple with risk-aversion.