According to analysts at Commerzbank, there's very little chance that the labor market report will provide any support to the Australian Dollar. They made it clear that the employment figures in Australia will have a significant effect on the Australian Dollar.
If the labor market reveals that unemployment is on the rise, it will put pressure on the AUD. During the month of December, the employment rate fell. As a result, the unemployment rate in Australia was 3.5%.
For now, the unemployment rate is expected to peak somewhere around the 3.75% to 4% range and then go down from there. But if the unemployment rate starts to go even higher, it will pressure the AUD.
Basically, a strong labor market situation in Australia means that the RBA can do a lot more to tame inflation. The end result will be supportive of the Australian Dollar (AUD).
But for now, it appears that the analysts at Commerzbank believe that unemployment in the country will rise further in the next few months. This means that RBA might reduce the size of its future rate hikes or even introduce a temporary rate cut to support the market.
In case you don't know, the interest rate policy set by the RBA plays a key role in the strength or weakness of the labor market. In general, higher interest rates weaken the Australian economy and increase the unemployment rate.
On the contrary, low-interest rates support the Australian economy and decrease the overall unemployment rate in the country.
For now, the interest rate in Australia is set at 3.35%, which is the highest level in almost a decade. According to data, such a high-interest rate was only last seen somewhere around 2012, which tells us that the situation is very tense.
And all of this is done to control inflation in the country. Right now, the inflation is 7.8% y/y in Australia and the RBA is trying to tame this beast.