Trading in the Australian Dollar has materially changed over the last two weeks and the primary reason for this is quite simple: the unemployment rate has dropped from 6.2% to 5.9%.

This has so far helped the Australian Dollar gain 167 points vs. the USD, 613 vs. the GBP and 524 vs. the Euro. The change in unemployment was so great that my RBA Cash Rate model now expects rate increases of 92 bps. I personally don’t see any rate increases at this time, and as we can see in the chart below, the model itself is too blunt to give an exact reading as to where rates should be. It does however provide for a better reading on the general direction of the RBA cash rate.

Data: Bloomberg, Own Calculations

On the back of better than expected employment statistics, proposed rate cuts would appear less likely and I would also expect the AUD to gain further vs. the Euro and GBP.

According to overnight index swaps, the market is currently pricing in rate cuts of 20bps over the next 12 months. I expect this to turn more neutral at the next unemployment rate reading on December 12 if the reading remains near 5.9%. At this stage economists would also be more comfortable revising their outlooks.

On the other hand the interest rate market has already acted by lifting swap yields in favor of the Aussie dollar and FX traders have bought Aussie Dollar vs. the Euro and GBP. I expect to see more of the same in the weeks ahead. Also worth noting is that on the back of the unemployment reading two weeks ago, I turned bearish EUR/AUD, see here and here.

The biggest risk right now stems from potential dovish comments by the RBA at their rate meeting on Tuesday next week and whether or not the AUD reconnects with commodity market prices.

What Are The Chances That The Unemployment Rate Will Stay The Same?

According to Bloomberg News, the top unemployment rate forecaster over the last two years has been Societe Generale and it is suggested that they are expecting the unemployment rate to be in the 6.1 to 5.7% range until the 3Q of 2016. This is pretty much in-line with where the unemployment rate is right now.