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- AUD on defensive amid wages retreat, ahead of jobs data.

- Wage momentum slipping, putting focus on jobs and the RBA.

- CBA eyes AUD losses Thurs, as Morgan Stanley warns on 2019.

The Australian Dollar limped into the Wednesday session after first-quarter wage growth figures surprised on the downside just hours before the release of April jobs data, both of which are key to what the Reserve Bank of Australia (RBA) does next with its interest rate.

Australian wages grew by 0.5% in the first quarter of 2019, unchanged from the final quarter of 2018 and below the 0.6% increase that markets had been looking for. Despite the miss against expectations, the annual pace of wage growth held steady at 2.3%.

"Wages growth was slightly disappointing on a quarterly level," says Sue Trinh, Asia head of FX strategy at RBC Capital Markets. "Our economists don’t think it moved the dial too much for the RBA. But tonight’s employment number could if there is a big miss."

The quarterly pace of wage growth had shown signs of picking up last year, with pay packets rising 0.6% in the final three months of 2017 as well as in the second and third quarters of 2018, but it now appears to be decelerating with the economy producing another two back-to-back quarters of 0.5% increases.

This matters because the RBA needs faster wage growth, in region of 3% per year, in order to stoke the consumer price pressures it needs in order for inflation to rise back within the 2%-to-3% target band.

"The RBA’s point forecasts for the WPI are 2.4%/yr at Q2 2019 and 2.5%/yr at Q4 2019. However, according to our CBA economists, today’s data are consistent with those forecasts coming to fruition and don’t shift the monetary policy dial either way," says Kim Mundy at Commonwealth Bank of Australia.

Above: Pound-to-Australian-Dollar rate shown at daily intervals.

"On a one day view the AUD can count itself as the worst performer amongst its peers as anxiety grows about both the Chinese and the domestic economic outlook. Looking forward we expect AUD/USD to remain on the back foot and see scope for slippage towards the 0.68 area by year end," says Jane Foley, a strategist at Rabobank.

The RBA cannot raise its interest rate until the consumer price index is sustainably above 2%, which it hasn't been for a number of years. Without higher domestic interest rates the Australian Dollar could remain under pressure on currency markets until other central banks cut their own rates.

And if the RBA happens to cut rates, as currency markets think that it will sooner or later, then the Australian Dollar could find itself plumbing new lows against many of its rivals.

Mundy and Trinh say they don't see this week's wage data moving the dial for the RBA, but they've both warned that Wednesday's jobs data could bring forward the time at which the RBA becomes willing to cut its interest rate, potentially to as soon as June.

"There is a strong chance that the RBA will announce a rate cut at its next policy meeting on June 4," warns Rabobank's Foley.

The RBA has warned that its interest rate could go either up or down at the next change, after abandoning in February the tightening bias that had seen it looking to raise Australian interest rates.

Interest rates impact currencies through the influence they have over capital flows, which tend to move in the direction of the most advantageous or improving returns.

The RBA has blown hot and cold on the rate interest rate outlook since February, and signalled in its May policy statement that it has come no closer to cutting its interest rate. But financial markets are still betting heavily that Aussie borrowing costs will hit a new record low this year.

"The RBA decided to keep interest rates unchanged at 1.50% at the “live” May meeting but appears to be edging closer to a cut with an implicit easing bias. We expect a 0.25% rate cut in June as the housing downturn continues and employment growth weakens," says Diana Mousina at AMP Capital.

Above: AUD/USD rate shown at daily intervals.

"We expect AUD to remain largely stable against the USD butunderperform the majority of its DM counterparts this year," says Hans Redeker, head of FX strategy at Morgan Stanley, in the bank's mid-year outlook. "AUDUSD should slowly grind higher towards 0.71 by end-2019 as the USD weakens. Against the majority of its DM peers, AUD may stay as an underperformer as we expect the RBA to cut rates twice this year, in August and November, pushing yield differentials in favor of AUD weakness."

Pricing in the overnight-index-swap market implied on Wednesday an RBA cash rate of 1.39% for June 04, the date of the next meeting, which is far below the current 1.5% level and half way toward the 1.25% that would prevail if the bank did cut rates.

The implied rate for August 06, which is when most analysts see a rate cut coming, was 1.19% on Wednesday while the rate for November was just 1.03%. This means markets are close to having fully priced-in two RBA cuts for 2019.

"Tonight’s Australian April labour force report will largely make or break the case for a RBA rate cut in June (2:30am London). If the Australian unemployment rate unexpectedly lifts by a large margin, the pricing for an RBA rate cut will skyrocket and AUD/USD will depreciate by up to 1.5%," warns CBA's Mundy.

The next milestone for the Australian Dollar is the release of April jobs figures, which are due out in the early hours of the London Thursday, as the RBA has said that a sustained uplift in the unemployment rate or further fall in inflation will be certain to trigger an interest rate cut.

First-quarter inflation figures have since surprised on the downside and the unemployment rate has increased by 10 basis points to 5%. Consensus is for the economy to have created 15.2k new jobs in April but for the jobless rate to have remained at 5%.

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