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- AUD rises following iron ore price gains and September jobs data.

- Chinese pollution measures set to continue supporting iron ore price.

- Jobs growth shifts toward full-time, buy the AUD/CAD rate says TD.

The Australian Dollar edged higher Thursday as traders responded to a sharp overnight increase in the iron ore price and following an upbeat labour market report for September.

Prices of iron ore, Australia's largest export, rose 1.5% Thursday after China's Ministry of Ecology and Environment imposed sweeping capacity cuts on some of the country's largest steel mills through November for air quality purposes.

Although the measures mean less steel will be produced at some of these mills, implying less demand for iron ore during coming months, they are expected to increase demand and prices for Australia's "high grade" iron ore.

"That is because higher grade ores boost productivity and lower emissions at steel mills," says Vivek Dhar, a commodities strategist at Commonwealth Bank of Australia (CBA).

China's intervention came alongside labour market data for September, which showed Australia's economy created just 5,600 new jobs overall during the recent month, far below the consensus for an increase of 15,200.

However, the unemployment rate fell 30 basis points to 5%, when markets had looked for it to hold at 5.3%, due to a change in the size of the labour force.

Although jobs growth was weaker than many had hoped, the poor headline number masks another positive shift in the balance between the portion of workers on full-time and part-time contracts down under.

Above: Westpac graph detailing balance between full and part-time jobs growth.

"The mix was more positive with a 20.3k gain in full-time employment vs. a –14.7k decline in part-time employment," says Justin Smirk, an economist at Westpac. "However, the big surprise was the fall in the unemployment rate to 5.0% which is what has historically been argued to be the level for the natural rate of unemployment in Australia."

After more than a year of abnormally strong growth, an easing of momentum was always going to hit the Australian jobs numbers sooner or later. But Smirk says the continued shift toward full-time employment has more than made up for the disappointing growth number.

"You need to look through the monthly volatility in the Labour Force Survey and focus on the broader trends in the labour market," says Smirk. "We would describe the September survey as a sound update and expect that it is likely the unemployment rate will end this year with a 5 handle."

Above: AUD/USD rate shown at daily intervals.

The AUD/USD rate was quoted 0.19% higher at 0.7124 Thursday while the Pound-to-Australian Dollar exchange rate was down 0.24% at 1.8379.

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

Markets care about the labour market data because falling unemployment and improving job creation, according to conventional thinking on the subject, put upward pressure on wages.

Pay growth leads to increased demand within an economy and exerts upward pressure on inflation, with implications for interest rates and financial markets.

Changes in interest rates are only normally made in response to movements in inflation but impact currencies because of the push and pull influence they have on international capital flows and their allure for short-term speculators.

The Reserve Bank of Australia has held its interest rate at a record low of 1.5% for what is now the 27th consecutive month, while the U.S. Federal Reserve and Bank of Canada have raised their own rates to 2.25% and 1.5% respectively.

The U.S rate is expected to finish 2018 at 2.5% while analysts say the Canadian benchmark will rise to 1.75%.

This has turned the tables on the Australian Dollar, which has for the last two decades benefited from interest rates that were typically higher than those elsewhere in the developed world.

The differential has provided an incentive for investors to sell the Australian Dollar and buy the U.S. Dollar or Canadian Loonie. Accordingly, the AUD/USD rate has declined 7.8% in 2018 while the AUD/CAD rate is down 5.5%.

"Our tracking of market growth forecasts shows that the street has upgraded its view on year ahead growth. Consistent with this data set, AUD data surprises have performed well in both level, and delta terms are sitting near the upper end of the G10 league table," says Mark McCormick, North American head of FX strategy at TD Securities, in a recent note.

McCormick and the TD Securities currency team say the sheer scale of losses suffered by the beleaguered Australian Dollar this year means the Antipodean has scope to recover some ground from its rivals regardless of what central banks do in the short term.

They are betting on a move up for the AUD/CAD rate to 0.96 over coming weeks, from 0.9250 Wednesday, and have a stop-loss set at 0.9040.

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