Australian dollar whipsawed by jobs surge, rate call

SYDNEY/WELLINGTON: The Australian dollar was whipsawed on Thursday as a resoundingly strong jobs report sent it flying, only to be brought to earth by a forecast of rate cuts from one of the major local banks.

The Aussie dollar initially jumped almost half a cent to $0.7207 on the monthly labour report, before falling back to $0.7155 after Westpac predicted interest rates would be cut in both August and November.

The call on rates was boldly timed given the data showed jobs climbed 39,100 in January, more than twice the market forecast, while full-time employment surged 65,400.

The unemployment rate stayed at a seven-year low of 5.0 percent, but would have fallen if not for a further rise in the number of people looking for work.

The detail of the report was also robust with the underemployment rate falling and healthy growth in hours worked.

"The story hasn't changed - the job market remains in strong shape," said Craig James, chief economist at CommSec. "More people than ever are looking for jobs and finding work."

"Arguably full employment has been achieved and the risk is that employers will have to pay more to secure staff," he added. "It means the Reserve Bank stays on the interest rate sidelines for an extended period."

The Reserve Bank of Australia (RBA) has already kept rates at 1.5 percent since mid-2016, but did concede this month that the next move could be down as well as up given the risk that falling home prices could drag on consumption.

Yet RBA Governor Philip Lowe also emphasised his confidence in the labour market and stated that only a significant and sustained rise in unemployment would provoke a cut.

That was exactly what Westpac chief economist Bill Evans predicted in a not to clients on Thursday.

"We have revised down our GDP growth forecasts for 2019 and 2020 from 2.6 percent to 2.2 percent," said Evans.

"With the slower growth profile we now expect to see the unemployment rate lift to 5.5 percent by late 2019," he argued. "That makes a strong case for official rate cuts to cushion the downturn and, in turn, meet the RBA's medium term objectives."

Westpac was the first of the four major banks to predict a cut. The others see rates on hold out into 2020.

Futures markets were in two minds with the probability of a quarter-point easing this year dipping to 68 percent after the jobs data, from 80 percent previously.

It had been as high as 96 percent at one stage last week.

Australian government bond futures also seesawed, falling on the jobs numbers before rallying on the thought of lower rates.

The three-year bond contract added 3 ticks to 98.385, while the 10-year contract rose 4 ticks to 97.9350.

Across the Tasman, the New Zealand dollar was having a much calmer session being little changed at $0.6845.

Its fireworks came last week after the country's central bank sounded less dovish on interest rates than bears had been betting on, triggering a wave of short covering.

The kiwi had been as low as $0.6720 at one stage before recovering. Resistance now lies around $0.6893 with support at $0.6815. New Zealand government bonds were well bid, with yields down as much as 4 basis points.