Insights 
VT 
The AUD/USD pair has dropped over 0.5% to around 0.6480 during Tuesday’s European trading session. This decline occurs despite a new trade agreement on critical minerals between the US and Australia, seen as reducing US dependency on China.
The ongoing trade tensions between the US and China include the imposition of export controls on rare earths by China. The US responded with a 100% tariff increase on imports from China, though it is suggested that these tensions may be easing.
The Impact Of The US Dollar
The US Dollar continues to rise, with the Dollar Index reaching near 99.00, even though the Federal Reserve is anticipated to cut interest rates soon. The FedWatch tool indicates a nearly priced-in 25 basis point rate reduction, bringing rates to between 3.75% and 4.00%.
The health of the Chinese economy significantly impacts the Australian Dollar due to China being Australia’s largest trading partner. The price of iron ore, Australia’s biggest export, also plays a critical role in determining the value of the AUD, with higher prices usually strengthening the Australian currency.
We are seeing the AUD/USD pair under significant pressure, trading near 0.6480 despite the new critical minerals deal with the US. This positive local news is being completely overshadowed by the strength of the US dollar, with the DXY index pushing towards the 99.00 level. The market is clearly prioritizing major macroeconomic themes over smaller bilateral agreements.
The key divergence for traders to watch is between the central banks. The Reserve Bank of Australia held its cash rate firm at 4.35% earlier this month, citing stubborn inflation, while the market has almost fully priced in a 25 basis point cut from the US Federal Reserve next week. This widening interest rate differential in favor of the Aussie dollar is being ignored, which signals a strong bearish sentiment.
Factors Affecting The Australian Dollar
Adding to the Aussie’s weakness are headwinds from its main trading partner and key export. Recent data from last week showed China’s Q3 GDP growth came in at 4.8%, missing expectations, and the price of iron ore has subsequently slipped below $110 per tonne. These fundamentals provide little support for the Australian dollar at present.
All eyes should now be on the delayed US Consumer Price Index (CPI) report due this Friday. August’s inflation reading, looking back, was a sticky 3.5%, so another high number could complicate the Fed’s decision to cut rates and add even more fuel to the US dollar’s rally. A cooler-than-expected number is needed to give the AUD/USD any chance of a short-term bounce.
Given this backdrop, traders should consider positioning for further potential downside in the AUD/USD pair. Buying put options could offer a defined-risk way to profit from a continued slide, especially if Friday’s US inflation data comes in hot. Alternatively, selling out-of-the-money call options or establishing bear call spreads could be a strategy to capitalize on what appears to be a very limited upside.
