Governor Lowe and the RBA have made it known that there monetary policy moves at the moment are largely linked to the unemployment rate.

Lowe would like to see the current rate fall to 4.5% (or better) from where it sits currently at 5.0%. But is this target a little bit much too chew off given what we’ve seen historically?

The theory goes, that if the excess capacity in the labour market gets used up, that would force wages to rise and that would all drive inflation back up into the RBA’s target band of 2-3%. The big problem with this theory as I see it is that the last time we had an unemployment rate of sub-4.5% was in 2008.

Let’s think about what the economy was looking like back in 2008. We had just had the beginnings of the mining boom in Australia. That saw a huge need for labour in the mining states where places like Western Australia, Darwin and Queensland saw hundreds of thousands of new jobs being created each year. This was also before the worst of the GFC weighed on credit markets worldwide and led to a big pullback in stock markets.

So for Lowe, to be linking the fate of interest rates to a jobless rate, it seems that aiming for boom times, to hold off on further rate cuts does seem a bit ambitious.

As it stands, there has been solid growth in jobs, with an estimated 360K new jobs having been created in the last 6 months according to the ABS. However, Australia has a healthy level of migration, which does dilute these numbers a little bit.

So generally speaking the jobs situation isn’t as dire as it might appear, despite the headlines 5.2% rate. We also have to remember, that prior to the first of the rate cuts, the jobless rate was sitting at 5.0%, so while not ideal, it wasn’t far from where owe would be a lot more comfortable.

The Fate of the AUD/USD

What all this suggests is that there is now a fair bit of attention on this week’s jobs report out of Australia. As it stands the AUD/USD, is still holding below the 0.7050 level as the market is still of the belief we will see another rate cut this year. That would take the OCR under 1.0% – a place that would leave Lowe with very little room to move in the event the jobs situation really started to go the wrong way.

I’m still very much bearish on the Aussie, despite the recent weakness in the Greenback. Lowe seems that he is intent on keeping rates at record low levels, while the FOMC future cuts are now surely priced in.

This is a big week for the Aussie and this Thursday’s number will be one of the most highly anticipated events in some time.