Australia’s June labour force report is expected to show employment rising by 15k, down from 40.3k in May, while the unemployment rate is forecast to hold at 4.4% for a second month. That would sit above the Reserve Bank of Australia’s June projection of 4.2%, keeping attention on whether labour market conditions are cooling relative to the central bank’s assumptions.
Rates pricing still leaves room for further tightening. Cash rate futures imply a 60% chance of one additional 25 bps increase by year end, which would take the policy rate to 4.60% from 4.35%. The backdrop includes the RBA’s expectation that real GDP growth will run below potential over the next two years, and its view that the current cash rate is near the top of model-based central estimates of the nominal neutral rate, conditions that would be consistent with an extended pause and a headwind for the AUD.
Implications For The Australian Dollar
As we digest the latest Australian labor data, we believe derivative traders should prepare for a weaker Australian Dollar (AUD) in the coming weeks. The June employment report shows a modest gain of only 15,000 jobs, while unemployment holds steady at 4.4%. This cooling labor market supports our view that the Reserve Bank of Australia (RBA) will keep interest rates on hold at 4.35% rather than pushing ahead with another hike.
Currently, cash rate futures are pricing in a 60% probability of one last 25-basis-point rate hike to 4.60% by the end of the year. We see this as an overvaluation, especially since Australia’s annual GDP growth has lingered below its historical potential rate of around 2.5%. Traders can exploit this misalignment by shorting AUD/USD or buying Australian bond futures, anticipating that yields will drop as hike expectations fade.
Trading Strategies And Market Outlook
Historically, when the RBA’s cash rate sits at the top of its estimated nominal neutral range—currently calculated by economists to top out near 4.35%—monetary policy exerts a heavy drag on economic expansion. Recent retail sales figures and soft consumer confidence indexes further confirm that high borrowing costs are sufficiently restrictive. We expect the market to rapidly price out the final rate hike, which should drag the AUD down toward its support levels near 0.6500 against the US Dollar.
To capitalize on this, we recommend utilizing options strategies like buying AUD/USD put options to limit risk while capturing downward momentum. Selling AUD against stronger commodity currencies also offers a compelling relative-value trade. By positioning for an extended RBA pause, we can get ahead of the curve before the next central bank meeting forces a market repricing.
