Strong Australian jobs data has influenced rate-hike pricing, but expectations may exceed actual inflation figures. Despite AUD’s strength across exchanges, AUD/USD remains vulnerable.
The AUD and NZD have been top performers in the G10 since January, due in part to their distance from geopolitical risks and stable fiscal prospects. Domestic factors also played a role, as unemployment unexpectedly fell to 4.1% with a 65,000 increase in employment, mainly in full-time roles.
Employment Surge and Market Reactions
This employment surge led to a 12 basis point rise in the two-year AUD swap rate, with markets anticipating 15 basis points of tightening by February and 34 basis points by June. However, this may be premature, as upcoming CPI data could be lower than the Reserve Bank of Australia’s forecasts.
While cautious about continuing AUD/USD bets, the Australian dollar should perform well against other currencies.
Looking back to this time in January 2025, we saw a similar situation unfold after a surprisingly strong jobs report pushed unemployment down to 4.1%. Markets aggressively priced in Reserve Bank of Australia rate hikes, but those expectations proved premature when the subsequent inflation data came in softer than anticipated. This history suggests that the market’s initial reaction to jobs data can often run ahead of the underlying price pressures in the economy.
Fast forward to today, we are seeing a familiar pattern with the latest labour force data showing unemployment has fallen to 3.8%, well below consensus estimates. The two-year Australian government bond yield has jumped in response as the market is now pricing a greater than 70% chance of a 25 basis point hike by the RBA’s March meeting. However, with global oil prices having softened through late 2025, there is reason to believe the upcoming inflation print may not justify such a hawkish stance.
Opportunity for Derivative Traders
This divergence presents a potential opportunity for derivative traders who believe inflation will again undershoot the RBA’s forecasts. Selling out-of-the-money call options on AUD/USD could be a way to position for a potential retracement if inflation figures disappoint the hawks. Implied volatility on the Aussie dollar has ticked up to around 9.2% for one-month options, making option-selling strategies more attractive now than they were in December.
We think the Australian dollar could remain well-supported against other currencies, especially those with more dovish central bank outlooks. The European Central Bank’s recent commentary, for example, has hinted at potential rate cuts later this year, contrasting sharply with the RBA’s hawkish hold. This policy divergence supports strategies like buying AUD/EUR call options, which would be insulated from any broader US dollar strength.
