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Impact Of Trade Negotiations
Trade negotiations continue, with US and China assessing prospects. Chinese economic health and Iron Ore prices remain influential for the AUD.
Australian Prime Minister Anthony Albanese’s re-election provided support for the AUD. The Reserve Bank of Australia’s interest rate moves and Australian exports play key roles in the currency’s valuation.
Changes in the Chinese economy can directly affect the AUD, given China’s position as Australia’s largest trading partner. Higher Iron Ore prices and a positive Trade Balance support the AUD.
NAB anticipates an AUD/USD rise to 0.70 by year-end. Westpac foresees a rate cut by the RBA, reflecting changing market conditions.
That AUD/USD has slipped from 0.6493 to roughly 0.6450 shouldn’t come as a surprise; the US Dollar has firmed on the back of a Services PMI print that outpaced projections. The ISM figure, sitting at 51.6, suggests the service sector continues to hum along, even as manufacturing and broader economic indicators raise questions. The accompanying upticks in the New Orders and Employment sub-indices only strengthen the case that the Fed, despite growing pressure, may remain hesitant to pivot dovish too prematurely.
Prime Minister Albanese And The Economic Landscape
For those engaged in derivative positioning, we are watching this short-term USD strength closely. It’s not just numbers surprising to the upside—it’s also timing. These data drops are arriving just in time to feed into the Federal Reserve’s internal deliberations. A strong service reading during this window, especially with job-related data holding up, adds to the hawkish lean that could extend USD support, at least in spurts, should policy rhetoric affirm resilience. That complicates any directional plays on the AUD, particularly for those assuming strength would largely return on the back of Australia’s domestic outlook.
In Australia, Prime Minister Albanese’s renewed mandate has offered some steadiness, though it might be more symbolic than market-moving in the short run. What matters more right now are the Reserve Bank’s signals. Interest rate expectations locally have started to shift, partly due to hints from RBA board members and inflation remaining somewhat anchored. Westpac’s base case now includes a rate cut in the coming months—a stance that requires attention. Lower yields typically reduce carry appeal, which could limit the AUD’s capacity to rally decisively barring some kind of upside surprise in terms of external demand or commodity terms-of-trade.
We’re also seeing continued focus on China. Not in the geopolitical sense necessarily, but direct economic dependencies—especially on Iron Ore—are still the heartbeat of AUD strength or weakness. A well-supported AUD often reflects robust Chinese industrial demand, even if markets don’t always acknowledge where that strength is stemming from. Our data estimates already show that an uptick in Iron Ore prices aligns neatly with AUD holding gains during otherwise-shaky global sessions.
Still, while NAB’s target near 0.70 suggests longer-term optimism, path dependency matters. Getting there assumes a stabilising Chinese economy, no sudden turns in geopolitical trade tensions, and possibly a softer USD towards year-end. Any deviation from this trajectory poses challenges. Derivative portfolios built around that upper bound should consider layering in flexibility—especially with weekly vol profiles implying wider distributions in both tails.
Current volatility measures are not mispriced but offer less premium compensation than earlier in the quarter. This is especially true for near-dated options straddling key macro events. With market-implied ranges tightening even as economic data delivers broad surprises, there’s room for recalibration. Holding delta-neutral positions might give better reward-to-risk below the 0.6500 level in the near term—particularly as RBA uncertainty becomes more priced in.
What we’re really seeing is a tug-of-war between domestic rate path pressures and external commodity and political tailwinds. That won’t settle definitively this month. So any short-term bullish bias needs to be hedged with data reactivity in mind. If China sustains its stimulus momentum and US figures begin to tear lower, the case for AUD comeback by late Q2 builds. But that’s a conditional bet, not a guaranteed retracement.
In the meantime, spread management becomes key. Cross plays—such as AUD/JPY or AUD/NZD—may offer cleaner thematic reads for positioning rather than staring at AUD/USD in isolation. Watch implied vol skews in these pairs for early cues, especially if there’s risk-off behaviour emerging from the US side that could nudge the broader USD tone.
As always, sequencing matters. We understand the temptation to chase levels, particularly into macro data rounds, but the forward curve and delta patterns suggest patience might reward those waiting for clearer signals from policy shifts or trade figures before recalibrating longer exposures.
