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Australia takes pride in being the only major economy to dodge a technical recession last year. Along with the RBA‘s third 25-basis point rate hike last December, the Australian government started to withdraw some of their stimulus programs as well. “It’s all uphill from here”, they probably thought.

Just when it seemed like that nothing could stop the Australian economy from booming, news of a massive 5.6% contraction in Australia’s December home loans hit the Land Down Under’s ego. Apparently, the recent rate hikes didn’t do the housing industry any good as the combination of higher borrowing costs and fewer government grants caused the number of home loans in November to slide to its lowest level in 18 months.

This decline in housing demand may have a negative long term impact on employment since it limits real estate firms from building more homes. This would translate to a standstill in hiring, not only for construction firms, but also for furniture and utility companies. So, you see, a downbeat housing market could eventually lead to a worsening labor situation.

As mentioned, the upshot of the slide of Australia’s home loans on employment is stretched over the long term since the buying and selling of real estate is not as liquid as buying securities over the secondary market. People usually take several months, from searching for homes to processing papers, before completing a home purchase transaction. Even if nobody is buying homes at the moment, it doesn’t necessarily mean that real estate firms will fire some of their agents right then and there.

In fact, the upcoming Australian report even suggests that hiring probably picked up pace. According to the consensus, Australian firms probably added around 10,200 more jobs in December on top of the 31,200 newly hired employees in November. With job advertisement listing rising by 6% during the same period, we might see another upside in Australia’s employment report. Although the country’s unemployment rate is projected to reach 5.8%, the 42,700 net employment change over the past three months could keep the jobless rate steady at 5.7%.

Now, how will things play out once the employment report is released? Let’s look back at how the price action panned out in the past few days. With the recent break of correlations between currencies, it appears that fundamentals could be playing a more central role in the markets. Look at the initial reaction upon the release of the home loans data: The poor figures spooked currency traders, who unloaded their long positions and started selling the Aussie.

If the employment figures come out worse than expected, it may lead to further Aussie selling. Then again, more jobs are expected to be added to the economy, so it may be the catalyst the Aussie needs to regain some of its losses.

The bigger question is: How will the RBA react to employment figures? By this, I mean what are they going to do about those interest rates?!

While we did see some positive data from Australia, recent developments suggest that the degree of improvements wasn’t enough to help the other sectors of Australia’s economy, particularly the housing sector. Some analysts already warned the RBA that they could be hiking rates way too soon and way too fast. For them, there was no reason to hike rates as inflationary pressures were pretty much contained.

As much as I’d like to disagree and give the Australian economy an A+, I can’t. In my humble opinion, the damage the RBA’s rate hikes could do to Australia’s economy is putting a serious dent on consumer and investor confidence. My crystal ball tells me that, unless the RBA starts to tone their hawkishness down a notch, more damage could be seen. These interest rate hikes are starting to get really tricky…