The Australian Dollar (AUD) declined, with the AUD/USD pair trading at around 0.6600 during Asian hours. This drop follows reports that China directed steelmakers to halt new purchases from BHP, although Mysteel disputed this claim. Australia’s AiG Industry Index rose to -13.2 in September, while the S&P Global Manufacturing PMI fell to 51.4. The Reserve Bank of Australia held the Official Cash Rate at 3.6%, with Governor Bullock indicating inflation is stable but refrained from forward guidance.

The US Dollar Index remains steady at 97.80, as traders wait for the US ADP Employment Change and ISM Manufacturing PMI data amidst a government shutdown. The probability of Fed rate cuts has increased, with a 97% chance for October and 76% for December. US Job Openings show an increase to 7.23 million, while the hiring rate dropped to 3.2%.

Australian Building Permits and AUD/USD Outlook

Australian building permits fell 6% in August, surpassing a forecast decline of 5.5%. The AUD/USD shows a bullish bias, with potential to explore 0.6707 and support at 0.6590. The AUD’s performance involves factors such as Reserve Bank rates, iron ore prices, the Chinese economy, Australia’s inflation, growth, and trade balance.

The Australian dollar is steady around the 0.6600 level against the US dollar, but the key driver for us is the significant weakness expected from the Greenback. Conflicting reports about China potentially halting Australian iron ore purchases are creating noise, but the bigger story is monetary policy. The market is pricing in a massive 97% chance that the US Federal Reserve will cut interest rates in October.

This outlook for the US contrasts sharply with the Reserve Bank of Australia, which just held its cash rate at 3.6% and is not providing any guidance on future cuts. This difference in policy, where the US is expected to ease while Australia stands firm, creates a supportive environment for the AUD/USD pair. The ongoing US government shutdown also weighs on the dollar, especially with the Labor Department suspending key data releases like the monthly jobs report.

The main risk we need to watch is the health of the Chinese economy and commodity prices. We’ve seen iron ore futures on the Dalian exchange slide in the final week of September 2025, reflecting nervousness about demand. Any confirmation of a slowdown in Chinese buying could quickly send the Aussie dollar lower, regardless of what the US Fed does.

Strategy for Protecting Against Downside Risk

Given the strong likelihood of a weaker US dollar, we should consider buying AUD/USD call options to position for a potential move higher in the coming weeks. The technical chart shows a bullish bias, with a possible test of the recent 12-month high near 0.6707. This strategy allows us to profit from upward movement while capping our potential loss at the premium we pay for the option.

However, to protect against a sudden downturn caused by negative news from China, pairing this with a protective put option is a sensible strategy. Buying puts with a strike price below key support, such as the 0.6540 level, would act as insurance. This helps us manage the downside risk if the iron ore situation worsens or if Australian economic data disappoints.

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