The Australian dollar eased against the US dollar on Monday after softer domestic data reduced pressure on the Reserve Bank of Australia to tighten further. AUD/USD slipped to around 0.6920, retreating from two-week highs near 0.6050 set on Friday, while the three-month low at 0.6865 remained close by. The Melbourne Institute’s TD‑MI Inflation Gauge showed prices fell 0.4% in June after a 0.3% drop in May, and the annual rate cooled to 3.9% from 4-4% previously, reinforcing expectations for a policy pause.
Other releases also pointed to cooling momentum. The ANZ Commodity Price index declined 1% in June, reversing a 0.7% rise in May, and ANZ Job Advertisements slipped 0.2% after an upwardly revised 2% gain. In external drivers, comments from Iranian authorities about the Strait of Hormuz weighed on risk appetite. US attention later turns to the ISM Services Purchasing Managers’ Index, followed by remarks from Federal Reserve Governor Christopher Waller.
—RBA Pause and Vulnerability of the Australian Dollar
With Australian inflation and job advertisements both showing signs of cooling, we believe the Reserve Bank of Australia is firmly on hold. This removes a key support for the Australian Dollar, making it vulnerable to further declines. We are therefore positioning for the AUD/USD pair to test and potentially break its recent three-month low of 0.6865.
For the coming weeks, we see value in buying AUD/USD put options with a strike price around 0.6850. Recent data from the CME Group shows a notable increase in open interest for puts below the 0.6900 level, suggesting other traders are also anticipating a downward move. This strategy offers a defined-risk way to profit from further weakness in the currency pair.
—Policy Divergence and Market Implications
This view is strengthened by the divergence in economic momentum with the United States. While Australian data is softening, recent US figures like the Non-Farm Payrolls report, which added 272,000 jobs in May 2024, and a resilient ISM Services index above 53, suggest the Federal Reserve has less reason to cut rates aggressively. This policy difference should continue to favor the US Dollar over its Australian counterpart.
We are watching the next quarterly Australian CPI data release in late July as a key event risk. Implied volatility for AUD/USD options expiring after that date is elevated, indicating market uncertainty. This presents an opportunity for traders to consider strategies that benefit from a potential spike in volatility around the release.
This scenario is reminiscent of the period in mid-2023 when a similar RBA pause, contrasted with a still-hawkish Fed, led to a significant multi-month decline in the AUD/USD exchange rate. Historical precedent suggests that when these central bank policies diverge, the trend can be persistent. We expect this fundamental pressure to weigh on the Aussie dollar through the remainder of the month.
