The report on Australia's labor market did not favor the Aussie. This is precisely why the AUD/USD pair was unable to overcome the resistance level of 0.7130 (the upper line of the Bollinger Bands on the D1 chart), despite the overall weakening of the greenback. The "Australian Non-Farms" have intensified the market's dovish expectations regarding the RBA's future actions. Thursday's report provided another argument for a softer stance by the central bank following the release of the inflation data. Therefore, long positions on the AUD/USD pair look risky, even amid the decline in DXY.
The most alarming signal from Thursday's report was the unexpected reduction in overall employment. In July, the number of employed Australians decreased by nearly 16,000 (15,800), while the market expected an increase of about 12,000. The "red" tone of the release looks particularly stark against the backdrop of a relatively strong June result, when employment increased by more than 80,000. Meanwhile, the unemployment rate rose from 4.4% to 4.5%.
The structure of the release also raises more questions than answers. On one hand, full-time employment increased by 16,300 people (reaching 10.2 million). However, this result was completely offset by a reduction in part-time employment — this indicator fell by 32,200 people. This means there was a noticeable deterioration in the part-time segment in July, indicating the first signs of weakening labor demand.
Another negative signal is the reduction in the number of hours worked. In July, the total number of hours worked decreased by 12 million hours, or by 0.6% for the month. This is significantly more important than changes in the number of jobs, as such dynamics indicate that labor demand may weaken not only through reduced hiring but also through decreased workloads for already employed workers. At the same time, the labor force participation rate decreased from 64.0% to 63.9%, and the labor force participation level fell to 66.9%. Meanwhile, the number of unemployed increased by 4,200 people.
The final "puzzle" is the indicator of part-time employment. It remained at 6.4% in July and, in annual terms, increased by 0.5%. As is known, this important indicator reflects hidden reserves in the labor market: a person may be considered formally employed but working fewer hours than they would like.
In general, the combination of rising unemployment, increased part-time employment, and a decline in total hours worked paints a rather negative picture, indicating a deterioration not only in quantitative but also in qualitative characteristics of employment.
"Australian Non-Farms" should be viewed through the lens of the latest inflation reports. Let me remind you that the quarterly CPI growth report was considerably softer than expected. By the end of the second quarter, the overall consumer price index rose by 3.9% year-on-year, after a 4.1% increase in the first quarter. The quarterly growth was only 0.6%, after 1.4% in the previous quarter. Core inflation (trimmed mean) also came in lower than expected at 3.6% year-on-year and 0.8% quarter-on-quarter.
In other words, the fundamental picture for the Australian dollar is becoming increasingly grim and "dovish." Previously, the combination of high core inflation and stable employment allowed traders to anticipate another rate hike this year. Still, now a serious counterbalance has emerged in this equation — the deterioration of the labor market.
Of course, it is still too early to discuss the prospects for an RBA rate cut. The "Australian Non-Farms" report for July is more about changing the balance of risks than completely overturning it. The steady growth in full-time employment serves as a "spoonful of honey." Still, the decline in overall employment (due to a reduction in part-time jobs), the rise in unemployment, and the decrease in hours worked paint a very convincing picture of a gradual cooling in the labor market. If subsequent data confirm the employment slowdown while maintaining a disinflationary trend, the market will gradually shift from expectations of another rate hike to discussions about the timing of a rate cut.
The weak release did not allow AUD/USD buyers to "spread their wings," despite the greenback's overall weakening. In this context, the key resistance level remains the target of 0.7130 (the upper line of the Bollinger Bands on the daily chart). If buyers are unable to overcome this level, the balance will tilt back towards short positions. The main targets for the downward movement will be 0.7070 (the upper boundary of the Kumo cloud on the D1 chart) and 0.7050 (the middle line of the Bollinger Bands on the same timeframe).
