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Stock markets softened on Friday in response to the US August labor market report. The S&P 500 dropped 1.7%, driven lower by losses in tech stocks, while the Nasdaq fell 2.6%. In Europe, the Euro Stoxx 50 ended the day down 1.6%, and the FTSE 100 declined by 0.7%. Meanwhile, the yield on the US 10-year dipped 2 bps to 3.71%, influenced by remarks from Fed Governor Waller, who expressed openness to a more significant rate cut in September.
US nonfarm payrolls rose by 142k in August, falling short of consensus expectations, while the unemployment rate dipped from 4.3% to 4.2%. There was a two-month downward revision of 89k, in line with the trend seen over the past two years. The three-month payroll average now stands at 116k, well below the estimated 200k monthly gain needed to maintain labor market balance. With inflation nearing the Fed’s target, achieving the full-employment mandate suggests that interest rates must be lowered.
Market expectations for a 50bp rate cut next month rose after Fed Governor Waller expressed that he believed the time for cuts had arrived and was “open minded” about the pace. He mentioned he would support larger cuts “if the data warrants it,” though the market seemed to overlook the conditional nature of his remarks. Meanwhile, NY Fed President Williams noted that risks to both employment and inflation are now balanced, though he emphasized that while further labor market weakness is undesirable, the Fed has not yet reached its inflation target.
AUD/USD will trade in a range around 0.6650 this week in our view. However, a soft US CPI could weigh on AUD/USD if risk markets, such as equities, retrench.
AUD/EUR will be sensitive to changes in ECB interest rate expectations. AUD/GBP can lift modestly if labour earnings growth in the UK continued to decelerate in August.
AUD/NZD will trade near is current level of 1.08 this week in our view.
AUD/JPY risks falling below support at 94.69 (23.6% fibbo) if global equity markets sell off again.
AUD/CAD will edge higher if market volatility declines now markets are pricing close to a 25bp interest rate cut from the FOMC next week.
AUD/CNHwill consolidate alongside AUD/USD this week in our view. The monthly economic data is unlikely to materially impact AUD/CNH.
Mid-market rates.
| Currency Pair | Mid-market rate |
| AUD/USD | 0.6671 |
| AUD/NZD | 1.0810 |
| AUD/JPY | 95.06 |
| AUD/CNH | 4.7371 |
| AUD/EUR | 0.6017 |
| AUD/GBP | 0.5079 |
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