The Australian Dollar (AUD) fell due to increased US-China trade tensions and expectations of a Reserve Bank of Australia (RBA) rate cut in November. September’s employment data increased the probability of a rate cut from 50% to 85%. Amid these tensions, the AUD/USD pair has continued to decrease, partly influenced by the strong trade links between Australia and China.

China’s plan to control rare earth exports could prompt alterations in the global supply chain. The US criticised these plans but left negotiation options open. Simultaneously, the US Dollar dropped due to the government shutdown and potential interest rate cuts, with the US dollar losing for four straight sessions and the US government shutdown continuing as the Senate remains deadlocked.

Fed Rate Cut Perspectives

The Fed’s Governor, Christopher Waller, supports another interest rate cut, while the new Fed Governor, Stephen Miran, is advocating an aggressive rate-cut approach for 2025. Currently, there is a 97% chance of a Fed rate cut in October, with an 83% chance of another cut in December. China’s September CPI fell by 0.3% YoY, with monthly inflation weaker than expected. The PPI fell 2.3% YoY, meeting expectations.

The Australian dollar is facing significant headwinds, creating opportunities for bearish positions. Escalating US-China tensions over rare earth minerals and weak Chinese economic data are weighing heavily on the Aussie. Domestically, the overwhelming expectation for a Reserve Bank of Australia (RBA) rate cut in November provides a clear catalyst for further weakness.

We see this view reinforced by fresh data from the Australian Bureau of Statistics, which showed this week that retail sales growth slowed to just 0.2% month-on-month in September, missing forecasts. This confirms the soft consumer momentum the RBA has been worried about. This weak domestic picture solidifies the case for a rate cut at the next meeting.

With markets pricing in an 85% probability of the RBA cutting its cash rate to 3.40% in November, traders should consider buying AUD/USD put options. Options expiring in late November with a strike price around 0.6400 could be an effective way to position for a drop following the central bank’s decision. The heightened uncertainty also suggests that implied volatility may increase, making now a good time to enter such positions.

Potential Strategies for Traders

This situation feels similar to what we saw back in 2019, when weakening employment and growth data preceded a series of RBA rate cuts. In that period, the AUD/USD pair steadily declined over several months as monetary policy eased. History suggests that when the RBA enters an easing cycle, the path of least resistance for the currency is lower.

The external environment offers little support, as China’s economy continues to show signs of deflation. Moreover, iron ore futures have slipped below $110 per tonne this month on concerns over Chinese steel demand, directly eroding a key pillar of Australia’s export revenue. As long as this trend continues, the fundamental value of the Aussie dollar will remain under pressure.

While the US dollar is also facing its own headwinds from the ongoing government shutdown and expected Federal Reserve rate cuts, the negative sentiment surrounding the Aussie appears more potent. The combination of domestic weakness and external risks creates a stronger bearish case for the AUD. Therefore, we should focus on the Aussie’s specific vulnerabilities.

Considering these factors, shorting the Australian dollar against a haven currency like the Swiss franc could be a prudent strategy. The AUD/CHF cross often declines sharply during periods of global uncertainty. Selling AUD/CHF futures or buying puts on the pair offers a way to hedge against the combined risks of an RBA rate cut and deteriorating US-China relations.

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