Aussie jobless, low inflation rates points to slowing wages

April's unemployment rate: The jobless rate in Australia has increased to 6.20% in April of 2015 from last month's 6.10%. Despite some month by month volatility, the jobless rate has been floating and stabilized between Q4 and Q1 and suggesting that growth in wages was steady at its recent very moderate rate.

Q1'15 Inflation: The headline inflation declined to a three year low of just 1.3% in Q1, which would have also contained wage demands.

Wage growth: We expect a fourth successive 0.6% QoQ increase in the official wage price index, which would cut the annual rate of growth to 2.4% from 2.5%, the lowest in the 16-year history of this series.

However, adjusted for inflation, real wage growth would pick up further to 1.1% YoY from 0.8% in Q4 and a low of -0.5% in Q2 2014.

Assuming the unemployment rate stabilizes around its current 6.2% level as we expect this series should begin to recover from Q2 onwards, helped by the depreciation of the exchange rate which ought to raise the pricing power of Australian workers.

We reckon as explained the above economic indicators, the low wages signifies the optimal costing in productions and may attract more production and in turn more exports volumes.

Derivatives Insights:

As it is sensed that all chances of Aussie dollar may look superior over Euro in medium term future, we advise to hedge the Euro's depreciation over AUD through below recommendations.

Option Strategy: Option Strips (EURAUD)

Unlike spreads, combinations allow adding both calls and puts at a time in our strategy.

The strip is more of customized version combination and more bearish version of the common straddle.

Buying a number of ATM calls and double the number of puts (1:2) establishes this position.

It is a combination the option instruments are to be of the same underlying currency, strike price and expiration date.

Huge profits achievable with the strip strategy when the underlying currency exchange rate makes a strong move either upwards or downwards at expiration, with greater gains to be made with a downward move. Hence, any hedger or trader who believes the underlying currency is more likely to plunge downside can go for this strategy.

Cost of hedging would be Net Premium Paid + brokerage/commission paid.