Insights 
VT 
AUD/USD has dipped towards the lower end of the 0.6440-0.6550 range observed this month. Australia’s labour market data for May showed a reduction in employment, with a loss of 2.5k jobs, differing from an anticipated gain of 21.2k jobs.
Full-time positions saw an increase of 38.7k, but part-time positions decreased by 41.1k. The unemployment rate remained steady at 4.1% for the fifth month, slightly less than the Reserve Bank of Australia’s (RBA) projection of 4.2%.
Labour Market Indicators
Leading indicators suggest a downturn in the labour market, with the NAB Employment subindex dropping to 0.4, its lowest since January 2022. Additionally, the Westpac-Melbourne Institute Unemployment Expectations subindex rose by 5% to 127.4, suggesting expectations of rising unemployment.
The RBA is projected to have capacity to implement further rate cuts. Futures for RBA cash rates suggest a 78% likelihood of a 25 basis point reduction to 3.60% at the upcoming July 8 meeting, predicting a total reduction of 75 to 100 basis points within the year.
As the AUD/USD flirts with the lower threshold of the most recent monthly trading band—specifically hovering near 0.6440—reaction in the derivatives space should be sharper this week. Recent employment figures out of Australia came in below consensus, registering an outright loss of 2.5k jobs rather than the widely expected 21.2k gain. That alone has been enough to stir directional assumption as expectations adjust.
Looking beneath the surface reveals that the bulk of the job loss stemmed from part-time roles, which fell by 41.1k. Full-time employment actually rose by 38.7k, but that wasn’t enough to offset the broader weakness. On paper, the unemployment rate held steady for a fifth consecutive month at 4.1%. That might sound stable, but in practical terms it’s marginally tighter than what the central bank had forecasted—a figure closer to 4.2%.
Advanced readings we monitor—such as the NAB Employment subindex dropping to just 0.4—aren’t painting a hopeful picture. This represents the lowest level since early 2022, and it mirrors what’s developing in consumer sentiment. The Westpac-Melbourne Institute’s measure of unemployment expectations jumped by 5%, the highest in some time. That particular metric is often a harbinger of where soft labour figures could be heading, adding weight to the notion that households are bracing for job market deterioration.
Monetary Policy Adjustments
Given all that, the question is not whether the central bank has room to manoeuvre, but when policy action will follow. Money markets have nearly locked in a 25 basis point rate cut next month, specifically on the 8th of July, assigning a 78% chance to that outcome. Beyond that, forward contracts are now pricing in as much as 100 basis points of easing before year-end.
Given these developments, there’s little ambiguity around the directional lean of Australian rates. That should be reflected not just in currency positions but also through rate-sensitive products. For us, this realignment between what the data implies and what futures markets have already partially baked in deserves careful calibration.
Shorter-dated volatility is likely to see an increase in appeal as the July meeting approaches. There may be scope for spreads to widen, particularly where positions are modestly long AUD or reliant on the hold narrative. Incorporating optionality on downside tails—especially in pairs like AUD/USD and AUD/JPY—seems increasingly viable.
Considering the labour softness and futures reaction, chasing short gamma strategies could quickly become expensive unless carefully hedged. Gleaning premium from those anticipating stability would’ve worked last month, but sentiment has shifted.
As traders, we’re focusing on the signals coming from domestic deterioration, not just the larger dollar flows. Repricing has started, but it hasn’t gone far enough relative to the policy shift that’s likely ahead. Traders acting on this now may find themselves ahead of the risk curve, should those rate cuts unfold on schedule.
