The Australian dollar has been on a steady rally through the week and has ended with another surge, driven by the US non-farm payrolls report.
At 8.30am AEST the Aussie was at 0.7436. That’s the highest it’s been in 2016 – in fact, the highest it’s been since July last year.
Here’s the chart of the US trading session, showing the steady rise in the Australian dollar ahead of the release of the jobs report, and then its leg higher as the jobs report was released at 8.30am US eastern time.
This shows the Australian dollar looking back to October last year. You can see surge that has eventuated since January.
The headline number of the US jobs report, at 242,000 jobs added last month, was a significant beat on expectations of 195,000.
However, wages growth fell 0.1% over the previous month, when an increase of 0.2% was expected. Wages growth through the year sat at 2.2% while the market was expecting 2.5%.
This matters because the US Federal Reserve is closely monitoring the inflation outlook and wants to see a sustained increase in inflation to continue with its intended path of increasing interest rates. Wages growth is critical to a sustainable inflationary environment.
Economic data that points to US interest rates remaining lower lower for longer has the effect of weakening the US dollar against currencies like the AUD.
This does cause a bit of a headache for the RBA. The weaker Australian dollar has been a crucial component in making sectors like tourism and education attractive and stronger growth contributors as resources activity has fallen in recent years. Many forecasters have been predicting an Australian dollar at US65c or even US60c by the end of the year. There’s no sign of it getting there if the interest rate differential between Australia and the US remains where it is.