© Filipe Frazao, Adobe Stock

- AUD sweeps higher after solid labour market report draws bid.

- But rally is growing tired and mood music could soon sour again.

- As the housing market and Chinese economy continue to wobble.

The Australian Dollar swept higher against all rivals Thursday after official data showed the Antipodean labour market going from strength-to-strength in October, but some analysts are warning that things might already be about as good as they are likely to get for the Aussie currency.

Australia's economy created 32.8k new jobs during October, up from 7.8k in September and ahead of the consensus for jobs growth of 19.9k. This pushed the six-month rolling average up from 21.8k in September to 23.5k in October.

Robust jobs growth was enough to keep the unemployment rate stable at 5% during October, despite a 10 basis point increase to 65.6% for the "participation rate", which lifted the number of individuals who are classed as unemployed.

Both sets of numbers suggest the labour market continued to gather momentum during the recent month. And coming hard on the heels of a wage report that showed Aussie pay growth hitting a three-year high in the third-quarter, market sentiment toward the economy and Australian Dollar has improved this week.

"The detail in the jobs report was strong. Full time jobs growth rose 42.8k while part-time fell 9.5k. Annual employment growth is running at 2.5% which is well above the rate of population growth and suggests the unemployment rate can continue to drift lower over time," says Kristina Clifton, an economist at Commonwealth Bank of Australia. "The recent data is consistent with our view that the next move in interest rates will be up."

Currency markets care about the labour data because faster wage growth means greater demand within an economy and higher inflation further down the line, which is important for the interest rate outlook.

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

"Whilst the latest wage and employment reports will likely see the Reserve Bank of Australia (RBA) retain its view that the next move in official interest rates is likely to be “up”, we believe the RBA will want to be sure that annual wage growth will move back above 3% before it will consider tightening policy, especially given the importance of wage growth to help build inflationary pressures and sustain household spending levels," says Lee Sue Ann, an economist at UOB Bank in Singapore.

Thursday's labour market report and Wednesday's wages data both suggest that inflation pressures are building gently in Australia.

But in the wake of those numbers, analysts have been almost unanimous in concluding that it is still not enough to make an interest rate rise from the Reserve Bank of Australia any more likely in the near future.

RBA rate policy has been a significant driver behind the Aussie's 2018 losses so the currency may only benefit from recent data for a short while. And other domestic factors as well as developments in the international arena could soon reclaim their earlier prominence and drive the Antipodean unit lower again.

Above: AUD/USD rate shown at daily intervals.

The AUD/USD rate was quoted 0.42% higher at 0.7262 Thursday but still carries a loss of 7% for 2018.

The GBP/AUD rate was 1.6% lower at 1.7662 following the opening of another calamitous chapter in the Brexit saga. It's now risen just 2.5% for 2018.

The Aussie was higher against all G10 currencies Thursday. Readers can view a summary of the latest Commonwealth Bank currency forecasts here.

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

"Upward momentum is not as strong as preferred and while AUD could move to 0.7315, it may find it difficult to maintain a toehold above this level (next resistance is at 0.7355). For now, there is no change to the ‘key support’ at 0.7150 but this level is expected to rise quickly over the next few days. Longer term, we see AUD/USD at 0.70 for both 4Q18 and 1Q19," says UOB's Ann.

On top of a moribund inflation outlook, the Australian housing market is wobbling and the Chinese economy is creaking beneath the weight of $250 billion of 10% tariffs on goods exported to the U.S. each year.

Housing market instability is cause for policymakers to fear a proliferation of negative wealth effects that could deter consumer spending and further undermine the inflation outlook. And a faltering Chinese economy is a negative omen for the Australian commodity export trade that contributes so meaningfully to the nation's GDP.

"As long as the downturn in the housing market remains divorced from the broader economy the RBA will continue to signal that rates are more likely to go up than down. But the risk of a negative wealth effect impacting consumer spending is rising the longer the downturn in dwelling prices persists," says Gareth Aird, a Commonwealth colleague of Clifton's.

Australian lenders have raised their mortgage rates this year due to an increase in international whosesale funding costs, which has taken more steam out of a real estate sector that was already cooling rapidly.

Higher borrowing costs are jilting the housing market at a time when "prudential measures" from regulators are seeking to crimp low quality and debt-driven demand after years of runaway price growth.

Moreover, Chinese industrial production growth has fallen from 7.2% in February, the month before White House tariffs on Chinese steel and aluminium were announced, to 5.9% in October.

Fixed asset investment has seen a similar decline and GDP growth slowed 10 basis points to 6.5% in the third-quarter, although some economists insist China is actually growing much more slowly than official figures make out.

This is important because Australia's currency is underwritten by its mammoth commodity exports to China so it is sensitive to good and bad news emerging from the world's second largest economy.

"We think there are reasons to be sceptical of the U.S. administration's motivation to secure a China trade deal in the wake of the mid-term elections. To reiterate, despite recent reports describing a 'thawing' in Sino-U.S. trade relations, Trump may well wish to adopt a more combative - not conciliatory - stance given the now limited legislative agenda available to Republicans after losing the House," says Adam Myers, a Commonwealth Bank currency strategist.

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