AUD Faces Dual Challenges: US CPI Data and Australian Labor Market Statistics

AUD: labouring away

The AUD has benefited so far this week from policymakers’ efforts in both Japan and China to resist further currency weakness. The AUD, acting as a proxy for the CNH for investors, has especially benefited from the PBoC’s strong stance against further CNY weakness.

The real test for the AUD will come from today’s US CPI data, however. The currency would receive a double whammy from an upside surprise in US inflation: (1) a weakening due to higher UST yields; and (2) the concomitant decline in risk sentiment with higher UST yields.

A further strong stance by the PBoC against more CNY weakness on the back of an upside surprise in US CPI data would further push investors into using the AUD as a proxy for CNY weakness. Australia releases its August labour market data on Thursday.

This data is likely to be more of a background driver of the AUD. The RBA made clear last week it maintains a modest tightening bias and with the market pricing in about a one-in-three chance of another 25bp rate hike by the RBA this tightening cycle, the risks around the data are skewed to the upside for the AUD.

Leading indicators for the labour market have softened, suggesting that Australia’s unemployment rate will continue to drift higher as employment growth slows.