Signals from the derivatives market keep shifting, leaving investors uncertain. Derivatives drop the idea of a cash rate hike and then return to it again and again. As a result, the AUD/USD pair keeps moving sharply up and down. Let’s explore these factors and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- Australia’s labor market crashes AUD/USD.
- Derivatives markets shift their RBA rate expectations.
- Hawkish signals are bringing the Aussie back to life.
- Consider buying the AUD/USD pair above 0.699.
Weekly Fundamental Forecast for Australian Dollar
A sharp fall can sometimes set the stage for a strong rebound. Weak employment data from Australia sent the AUD/USD pair to a three-month low. The economy lost 39,300 jobs, and the unemployment rate jumped to 4.7%. Investors concluded that the RBA’s aggressive monetary tightening was cooling the labor market and began to expect the cycle to end. However, the Australian dollar managed to recover from the drop.
Following the disappointing data, the odds of a cash rate hike in November dropped from 35% to 17%, and the chances of the RBA resuming monetary policy tightening in December fell from 60% to 40%. Before the jobs data, markets were confident of a rate hike by March 2027. Now the odds of a May hike have declined to 80%.
Australia’s Core Inflation and Unemployment Rate
Source: Bloomberg.
In theory, a cooling labor market should eventually ease inflationary pressure. Investors therefore found it reasonable that the derivatives market had dropped the idea of further tightening. The Reserve Bank sees it differently. Assistant Governor Christopher Kent noted that weaker employment could be the result of rising labor costs, which would point to further inflationary pressure. The RBA needs to find out what is really behind the job losses.
Investors saw these remarks as hawkish, along with comments from RBA Deputy Governor Andrew Hauser. He noted that when companies pass higher costs on to consumers, inflation expectations rise. The CPI outlook looks worse than the RBA had expected, even with the labor market weakening.
RBA Trimmed Mean Inflation Forecasts
Source: Bloomberg.
These remarks led the derivatives market to change its outlook once again. The odds of a cash rate hike from 4.6% to 4.85% at the RBA’s next meeting in November jumped from 30% to 50%. The market is fully pricing in a hike in February and expects another one to 5.1% by May.
The sharp swings in the AUD/USD pair come as no surprise, especially since the Fed is unlikely to continue tightening in October. The Aussie is getting a boost from a bullish commodity market and growing global risk appetite. Asset managers may be reducing the share of tech stocks in their portfolios, but this does not mean that interest in AI has faded.
China’s macroeconomic data was not weak enough to prompt the PBoC to step in. The yuan continues to rise against the US dollar, which supports the Australian currency.
Weekly Trading Plan for AUD/USD
As outlined in the previous trading plan, it makes sense to buy the AUD/USD pair while it trades above 0.699. You can also add to long positions on a breakout above 0.7035.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of AUDUSD in real time mode
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