FX - AUD/USD: Trading the Change in Australia Employment

Trading the News: Australia Employment Change

Why Is This Event Important:

Australia’s labor market is widely expected to improve for the eleventh month in January, and the rise in employment could strengthen the near-term rally in the local currency as the economic recovery gathers pace. As the Reserve Bank of Australia raises its growth forecast and sees the economy expanding 4.25% this year, a marked expansion in payrolls could lead the central bank to tighten monetary policy further as it aims to balance the risks for growth and inflation.

What’s Expected:

Time of release: 02/10/2011 0:30 GMT, 19:30 EST

Primary Pair Impact : AUDUSD

Expected: 17.5K

Previous: 2.3K

DailyFX Forecast: -15.0K to 15.0K

Will This Be Market Moving (Scenarios):

Employment in Australia is forecasted to increase another 17.5K in December following the 2.3K expansion during the previous month, while the jobless rate is anticipated to hold steady at 5.0%, which is the lowest reading since January 2009. However, as the region copes with the worst flood since 1975, the natural disaster could disrupt the expansion in economic activity, and a dismal employment report could spark a reversal in the exchange rate as the recent rally in the AUD/USD fails to produce a test of 1.0200.

The Upside

As the region continues to benefit from the rise in global trade, with retail spending increasing for the second consecutive month in December, businesses may lift their willingness to expand their labor force as the central bank holds a brightened outlook for the region. In turn, a marked advance in employment may lead the AUD/USD to extend the rally from the previous week, which could lead the pair to make another run at the 2010 high (1.0256).

The Downside

However, as business confidence slips to a 19-month low in December, with firms facing rising energy costs, private sector employment could fail to meet market expectations and spark a selloff in the exchange rate. A dismal labor report could trigger a sharp reversal in the AUD/USD as it appears to be carving a near-term top in February, and the pair may fall back below parity as interest rate expectations falter.

How To Trade This Event Risk

Trading the given event risk favors a bullish outlook for the Australian dollar as market participants expect the rebound in employment to gather pace in December, and market reaction subsequent to the release could set the stage for a long aussie trade as growth prospects improve. Therefore, if the economy adds 17.5K jobs or more, we will need to see a green, five-minute candle following the data to generate a buy entry on two-lots of AUD/USD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will establish our first target. The second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its mark in an effort to lock-in our profits.

In contrast, businesses may scale back on employment as they cope with higher borrowing and energy costs, and a dismal labor report could spark a selloff in the exchange rate as the outlook for growth and inflation deteriorates. As a result, if payrolls increase less than 5.0K or unexpectedly contract from the previous month, we will implement the same setup for a short aussie-dollar trade as the long position mentioned above, just in reverse.

Potential Price Targets For The Event

Impact the change in Australia Employment has had over the AUD during the last month

December 2010 Australia Employment Change

Employment in Australia increased 2.3K in December amid forecasts for a 25.0K expansion, while the jobless rate slipped to an annualized 5.0% during the same period to mark the lowest reading since January 2009. A deeper look at the report showed full-time positions increased 1.7K during the month, with part-time employment advancing 0.6K, and the marked expansion in the labor market may continue to cool off in 2011 as businesses face rising borrowing costs. As the region copes with the worst flood since 1974, the natural disaster is likely to bear down on economic activity throughout the first-half of 2011, and the central bank may retain its wait-and-see approach over the coming months as the fundamental outlook for the global economy remains clouded with uncertainties. The AUD/USD immediately spiked to a low of 0.9912 following the smaller-than-expected expansion in employment, but the selloff in the aussie-dollar was short-lived as the exchange rate ended the day at 0.9973.

Questions? Comments? Join us in the DailyFX Forum

Join DailyFX Currency Strategist John Kicklighter in the DailyFX Trading Room to Cover the market reaction LIVE!

View the Expo Presentation on ‘Trading the News’ For Additional Resources

To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com