AUD/USD slipped after two prior sessions of gains, hovering near 0.6930 in Asian trade, as Australia’s TD-MI Inflation Gauge fell 0.4% month on month versus a 0.3% decline previously. The move came as markets continued to parse the RBA’s June meeting minutes released last week, with the document framed around concerns over sticky inflation, persistent excess demand and capacity constraints, and a continuing risk of further tightening.
The US Dollar was steadier on expectations of multiple Fed rate rises later this year, even as global inflation pressure eased with oil flows normalising through the Strait of Hormuz. CME FedWatch pricing implies a 77.3% chance of rate hikes by year-end, with attention turning to the Fed’s June minutes due on Wednesday. Recent US labour readings complicated the outlook: NFP showed 57,000 jobs added versus forecasts of 110,000, while unemployment edged down to 4.2% from 4.3%. The Fed’s price stability target remains 2%, and inflation risks were described as moderating over the past month.
RBA Hawkishness Versus US Labor Weakness
We see the current dip in the AUD/USD around 0.6930 as a temporary reaction to a minor inflation report. This slight downturn follows two days of gains and presents a potential entry point for traders. The minor data point is overshadowing the more significant fundamental drivers at play.
The Reserve Bank of Australia’s recent minutes show a strong concern for persistent inflation, a view shared by major local banks. With Australia’s annual inflation rate still elevated at 3.6% as of the first quarter, we believe the RBA has a clear hawkish bias. This creates a distinct possibility of another interest rate hike to cool demand.
On the other hand, the US economy is showing clear signs of slowing down. Last month’s Nonfarm Payrolls report revealed a shockingly low addition of only 57,000 jobs, a major miss from expectations. This weak labor data seriously undermines the case for any near-term Federal Reserve rate hikes.
Financial markets, as indicated by the CME FedWatch tool, have not yet fully adjusted to this new reality, still pricing a 77.3% chance of a Fed hike by year-end. We anticipate this probability will drop significantly in the coming days as the market digests the poor employment figures. Historically, such a dramatic slowdown in hiring has forced the Fed to reconsider its tightening path.
External Support For AUD And Trading Strategy
Support for the Australian dollar also comes from strong external factors. China’s recent Caixin Manufacturing PMI came in at a solid 51.4, indicating expansion in the manufacturing sector of Australia’s largest trading partner. Furthermore, iron ore prices are holding firm above $100 per tonne, providing a favorable backdrop for Australian exports.
Given this divergence between a hawkish RBA and a potentially pausing Fed, we are positioning for AUD/USD to move higher. Derivative traders might consider buying call options on the AUD/USD to capitalize on this expected upward move over the next few weeks. This strategy allows for participation in the upside while defining risk in a volatile environment.
