AUD/USD edged higher to around 0.6900 in Asian trading on Thursday after modest losses, finding support in the Australian Dollar following domestic trade figures. Attention now turns to the US Nonfarm Payrolls report for June due later in the session, a key test for near-term Dollar direction.
Australia’s Trade Balance moved to a deficit of A$3,018M month on month in May, reversing from a surplus of A$1,383M previously, which itself was revised from A$1,791M; consensus had pencilled in a surplus of A$2,200M. Exports fell 6.9% month on month after a 7.2% rise, while imports increased 2.6% following a revised 0.2% gain in April, down from 0.8%. The US Dollar steadied after Federal Reserve Chair Kevin Warsh offered no explicit guidance on July and reiterated the 2% inflation target, while also flagging a preference to shrink the bond portfolio after public preparation. Broader risk sentiment improved after Qatar cited “positive progress” in US-Iran talks, and US Vice President JD Vance said discussions in Doha were going well, with nuclear talks expected soon.
Australian and U.S. Economic Data Set the Stage
We see the AUD/USD pair is caught in a tight range around the 0.6900 level, reflecting a tug-of-war between Australian economic weakness and a softer US dollar. This indecision is typical before a major data release like the US jobs report. The market is looking for a clear signal to break the current deadlock.
The surprise Australian trade deficit of A$3,018 million for May is a significant headwind for the Aussie dollar, especially with exports falling a sharp 6.9%. This weak data, combined with Australia’s quarterly CPI figure released last week which cooled to 3.5%, gives the Reserve Bank of Australia little reason to consider further rate hikes. This underlying weakness suggests any strength in the AUD may be short-lived.
On the other side, the US dollar is losing some of its appeal after the Federal Reserve’s recent comments were perceived as less aggressive. Market pricing, as seen in the CME FedWatch Tool, now shows the probability of a rate hike at the July meeting has fallen to just 40%, down from over 65% two weeks ago. This shift in expectations is currently capping the greenback’s potential upside.
Adding to the dollar’s softness is an improving risk appetite, fueled by optimistic reports from the US-Iran diplomatic talks. Historically, a decrease in geopolitical tensions reduces demand for the US dollar as a safe-haven asset. This environment tends to benefit risk-sensitive currencies like the Australian dollar.
Market Positioning Ahead of Key U.S. Jobs Data
The immediate focus for us is the US Nonfarm Payrolls report for June, which will be released later today. Market consensus is for a gain of around 195,000 jobs, a slight cooling from previous months. A significantly stronger number would likely revive Fed rate hike bets and boost the USD, while a weak report would reinforce the less-hawkish view and weigh on the currency.
Given the binary risk of the jobs report, we believe buying volatility is the most sensible approach. We are positioning by purchasing near-term AUD/USD straddles, which involves buying both a call and a put option. This strategy allows us to profit from a large price swing in either direction following the data release, without having to bet on the outcome.
