Wages are the most important variable in the interest rate equation at the moment given their significance for inflation, and Wednesday's Aussie numbers left a sour taste in the mouths of traders.

Wednesday’s wages report was the final nail in the coffin for some of those analysts that have been calling for an interest rate rise in the first half of 2018, who were already in a distinct minority.

While average wages grew faster than was expected during the December quarter, in very broad terms at least, the lion’s share of upward pressure on pay packets came from the public sector.

Pay pressures are still missing in action in the crucial private sector, according to Wednesday’s Australian Bureau of Statistics report, which comes barely a fortnight after a disappointing fourth quarter inflation numbers left a sour taste in the mouths of Australian Dollar bulls.

“While wages growth did not disappoint, ticking higher to 2.1%/y, the sluggish pickup combined with lower-than-we-expected underlying inflation and a patient RBA has spurred us to drop our long-held May hike,” says Annette Beacher, chief Asia Pacific macro strategist at TD Securities.

Australian wages grew by 0.6% during the fourth quarter of 2017, when compared with the same period in the previous year, when markets had pencilled in a lower rise of 0.5%. Annual pay growth was a healthy 2.1%.

However, wage packets grew by only 0.5% in the private sector during the quarter, which is in line with the subdued rate of headline wage growth seen over the last five months.

“The debate of central bank should vs will begin policy normalisation is never far away: our preference is to remain at the hawkish end of the analyst spectrum, but unfortunately, the RBA has emerged from its long summer hiatus pushing the 'gradual' theme, and we have to listen,” says Beacher.

“We continue to hold a defensive stance on AUD, given that the hurdle for a near-term rate hike by the RBA is higher. AUDUSD supports are located near $US0.7750, and 1.06 in AUDNZD,” Beacher adds.

The annual measures of Australian wage growth were just as disappointing as the quarterly numbers, with private sector pay packets rising 1.9% against a larger 2.4% increase in the public sector earnings.

Meanwhile, despite the headline beat, the higher annual measure of 2.1% pay growth is still close to the all time low of 1.9% seen earlier last year.

"It’s not the case that Australia is simply another country in the ‘low wage growth’ club. Australia was amongst the last to join the club, and likely to be one of the last to leave," says Tim Baker, a strategist at Deutsche Bank.

"Australian wages growth were materially outperforming until 2015, and are now lagging as other countries (most notably the US and Canada) look to be experiencing a wages revival."

Wage pressures, and labour markets by implication, are the most important macroeconomic variables in the global interest rate equation at the moment given their significance for inflation.

Central banks can only raise interest rates in response to changes in inflation pressures while it’s expectations of higher or lower interest rates that dictate the respective fates of the currencies tied to them.

"Of the eight G10 countries for which we have data, Australia ranks fifth for wages growth – the lowest ranking in the past decade. This is weighing on consumers – Australia has the worst consumer sentiment in G10, with the result that discretionary spending is barely growing," adds Baker.

The Reserve Bank of Australia held its cash rate at a record low of 1.5% for the 19th month in a row this February and pricing in interest rate derivatives markets currently implies that rates will remain here until well into 2019.

Minutes of the Reserve Bank of Australia’s latest meeting, released Tuesday, helped shed some light on policymakers’ current thinking around inflation and Aussie pay packets, while doing little to alter expectations of an initial rate hike.

"AUD/USD has been tracking market pricing for RBA moves. We expect hike expectations to slip further," Baker writes, in a note Wednesday. "A further pullback in RBA pricing could see the AUD/USD closer to the mid-70s."

The unmistakable message coming from the RBA, and the rub for Australia's Dollar, is that wage pressures are expected to rise only at a gradual pace, leaving the central bank content to be as patient as ever before recalibrating their policy.

"Of course, getting to 75c is tough given there’s a soft USD thematic to fight, and the global picture (commodities, EM equities) is supportive. But we are happy to remain sellers on any move above 80c," Baker concludes.

The AUD/USD rate was quoted 0.58% lower at 0.7832 Wednesday while the Pound-to-Australian-Dollar rate was 0.26% higher at 1.7805.

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