AUD: Risks skewed to the downside in 1Q20 - ING

Francesco Pesole, an FX Strategist at ING, notes the averted risk of another slump in employment lifted the AUD overnight. However, a look beyond the headline figure flags a less flourishing picture, so the risks of the Reserve Bank of Australia (RBA) easing and AUD weakness remains vivid.

• "The usual employment dilemma that AUD investors face each month yielded a positive result this time around: employment rose 39.9k in November, up from -24.8k in October and beating the consensus 15.0k increase. The unemployment rate inched lower to 5.2% (from 5.3%) while the participation rate was flat at 66.0%. After the release, AUD rose across the board.
• Looking beyond the encouraging headline numbers, though, the labour picture appears less flourishing: the rise in employment was almost entirely due to part-time hiring (35.7k) while full-time employment only rose by 4.2k. This likely suggests that, while the labour outlook has not deteriorated further, it remains mixed and likely unable to justify any hawkish tilt in the central bank stance.
• Today's data failed to further endorse markets easing expectations, but equally failed to rule out an early-2020 cut. The OIS curve is still showing a 60% implied probability of the RBA cutting rates in one of the first three meetings next year (4th February, 3rd March, 7th April).
• Indeed, with markets torn around easing prospects, the slew of data in the next five weeks (before the February meeting) will tell us a lot about what direction the RBA will take, especially considering that the external environment seems to have stabilised after the phase-one US-China deal. The table below highlights the key data to monitor.
• After benefitting from the supported trade-related risk sentiment, any additional bullish run in AUD is inevitably bound to be challenged by the risk of more RBA easing. In line with what's highlighted above, expect AUD moves in January to be mostly "data-dependent" given that the US-China trade story seems to have hit the pause button for now.
• We suspect that some material improvement in the data (employment and inflation) will be needed to convince the markets that no more RBA easing is on the cards, so the balance of risk for the AUD appears to be tilted to the downside in Q1."