More jobs...higher dollar

by David Taylor


Today we received quite an encouraging reading on the unemployment rate. It fell from 5 per cent to 4.9 per cent. Full-time jobs rose more than expected, and we actually saw an increase in part-time jobs as well. The majority of the gains were made in Queensland with post-flood construction efforts now well underway.


So what are the implications? Well on the upside, if you're looking for work right now you're more likely to find something. In fact when an unemployment rate dips under 5 per cent most economists would regard that as "full employment". It's a great jobs market - employers are hungry for workers.


On the downside, there has to be some upwards pressure on wages (and inflation). In its recent statement accompanying the April board decision on rates, the Bank mentioned that raising rates would not be necessary given, for one, "the earlier decline in wages growth". This now does not seem like a sustainable position given the current strong demand for labour - unless of course the jobless rate rises again in coming months as the Queensland market slows again.


The other factor to consider is that when more Australians are employed (and wages rise) the consumer has more purchasing power. This is likely to benefit the retail sector but is just another reason for the Reserve Bank to apply the brakes. If the current trend continues we could see an upwards move on rates as early as August.


Currency markets have certainly factored this in, lifting the dollar to a fresh post-float record high just shy of 105 US cents. Traders view the likelihood of further rate rises as a reason to buy the Aussie dollar (foreseeing that its demand will rise in the future given the higher yield it will attract being placed within an Australian financial institution in the form of a cash deposit).


Across the globe it's a completely different story with Portugal being the 3rd member of the Euro zone to request financial assistance from the European Union. They follow in the path of Greece and Ireland. The European sovereign debt crisis is still unfolding...


David Taylor


The content in my blog is non advisory, please do not interpret this as advice in any way shape or form. These are just my thoughts and nothing I say should be acted upon.

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