- Australian unemployment falls faster than expected, to 5.4%.

- Decline comes due to falling participation rate, weak jobs growth.

- Figures are relevant for wages, interest rate and the AUD outlook.

© Filipe Frazao, Adobe Stock

The Australian Dollar sold off Thursday as traders looked through a steeper-than-expected fall in the Aussie unemployment rate during May, to focus instead on a falling "participation rate".

Australia's unemployment rate fell to 5.4% in May, from 5.6% previously, when markets had looked for a smaller 10 basis point decline to 5.5%. However, the rate of new jobs growth was a meagre 12,000 in May, down from 18,300 in April and below the market expectations for growth of 18,000.

Closer inspection of the data shows the unemployment rate fall was the result of more workers hanging up their boots and exiting the labour market, not more unemployed people finding their way into work. In other words, it came after a fall in the so called "participation rate".

The number of full-time employees in Australia fell by -20,600 after rising 28,000 in the previous month and part-time employees rose by 32,600 from -8,700 in April. The larger rise for part-timers was viewed as a negative development for the Aussie given it is a sign of "underutlisation" in the labour market and weak jobs growth.

"Despite the fall in unemployment, this is a soft update due to a smaller than expected increase in employment, falling hours worked and the recognition that the lower unemployment rate was due to workers exiting the labour market rather than any underlying strength in labour demand," says Justin Smirk, an economist at Aussie lender Westpac Banking Corporation.

Unemployment is an important factor for the Australian Dollar because it impacts on the rate of wage growth down under and consequently, demand in the economy and inflation. Wages are thought to rise when there are fewer unemployed workers since there is less competition for jobs, which enables candidates to demand higher pay settlements and encourages companies to agree to them.

The AUD/USD rate was quoted 0.15% lower at 0.7557 Thursday morning while the Pound-to-Australian-Dollar rate was 0.54% higher at 1.7777. The Aussie was also lower against all other developed world currencies.

Thursday's price action comes after Reserve Bank of Australia governor Philip Lowe told a conference audience Wednesday that an interest rate rise "still looks to be some time away", citing slack in the labour market and weak wage growth, which have also contributed to a weak performance from the Aussie this week. The RBA has kept its interest rate at a record low of 1.5% for nearly two years now for these same reasons.

While Thursday's unemployment data failed to move the dial of market expectations for RBA policy, it does come after more than a year of strong jobs growth down under, which has left some feeling more optimistic about the future than the broader market.

"Things are beginning to get tight on the labour market down under, even though the impressive levels seen prior to the financial market crisis (4%) have not yet been reached again. The Reserve Bank of Australia (RBA) is therefore in no rush to hike the key rate, but contrary to market expectations it is likely to do so as early as year-end in our view. That means the AUD will appreciate over the course of the year," says Antje Praefcke, an analyst at Commerzbank.

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