The Australian Dollar recovers as optimism grows over a US-China trade deal, despite struggles due to potential near-term rate cuts by the Reserve Bank of Australia (RBA). The AUD/USD pair faces obstacles amid cautious trading, with focus on upcoming US inflation data and a data blackout.

The AUD gains support after President Trump’s optimistic comments on reaching deals with China during his meeting with Xi Jinping in South Korea. The AUD/USD pair contends with the possibility of a 25-basis-point RBA rate cut, with employment data showing a climb in the jobless rate, raising rate cut odds to 70%. Traders are alert to upcoming economic data, including PMI readings and Q3 CPI figures.

Trade Agreements Offer Support

The AUD draws backing from a US-Australia trade agreement, with a USD 8.5 billion critical minerals deal signed. The US Dollar Index rises around 99.00, bolstered by anticipation of agreements between Trump and Xi Jinping. However, the ongoing US government shutdown, now in its fourth week, delays key data releases, impacting market certainty.

A poll indicates a likely Fed interest rate cut by 25 basis points by the end of October, with a high market expectation for further cuts in December. Meanwhile, the People’s Bank of China’s decision to maintain its loan prime rates and steady GDP growth presents stable conditions. AUD/USD faces technical resistance around 0.6500, with further advances needing to overcome bearish momentum.

The Australian Dollar exhibits various percentage changes against major currencies, being notably strong against the Japanese Yen. Key factors influencing the AUD include RBA interest rates, global market sentiment, and economic conditions in China, Australia’s largest trading partner. The price of Iron Ore and the country’s trade balance also play critical roles in the currency’s valuation.

With the Federal Reserve almost certain to cut rates by 25 basis points next week, our focus is now on forward guidance. Recent US jobless claims ticking up to 225,000 and the ISM Manufacturing PMI remaining below 50 for a fourth straight month reinforce the view that the Fed must act. This widespread expectation of easing from the US central bank is currently capping the US Dollar’s strength.

Australian Economic Outlook

In Australia, the case for a near-term Reserve Bank of Australia rate cut is becoming overwhelming. The recent spike in the jobless rate was confirmed by yesterday’s Q3 CPI data, which came in at 2.8%, falling below the RBA’s target band and missing forecasts. We now see the probability of a November rate cut at over 85%, which should keep pressure on the Australian Dollar.

China’s slowing GDP growth, now at 4.8% annually, is directly impacting sentiment around Australia. This slowdown is reflected in key commodity prices, with iron ore futures slipping to around $105 per tonne, down from highs seen earlier in the year. This weighs on the Aussie, as China is our largest trading partner and the primary destination for our biggest export.

Despite these economic headwinds, positive news on the trade front is providing temporary support for the AUD. Ongoing optimism around the US-China talks and the more concrete US-Australia critical minerals deal are creating a floor under the currency for now. This makes any sharp downside moves difficult until we get a clear outcome from these discussions.

For AUD/USD derivative traders, the prevailing bearish trend suggests selling into any strength is the prudent strategy for the coming weeks. The area around the 0.6500 psychological level, which aligns with the nine-day moving average, represents a key resistance zone to initiate short positions. Our downside targets remain near the 0.6400 support level.

Given the conflicting signals between negative economic data and positive trade sentiment, we expect volatility to rise. Options traders should consider strategies that profit from price swings, such as buying straddles ahead of next week’s Australian CPI data or the Fed’s interest rate decision. This approach allows us to capitalize on a significant market move in either direction.

Unlike the market jitters we saw during past US government funding disputes, such as the shutdown in late 2018 and early 2019, the current focus is squarely on monetary policy. Delays in data releases are a minor concern compared to the trajectory of interest rates set by the Fed and RBA. Therefore, we should pay less attention to political noise from Washington.

Considering the AUD is showing strength against the Japanese Yen, a different trade may be warranted if risk appetite improves. If the US-China talks yield a positive surprise, going long on AUD/JPY could offer better returns than trading AUD/USD. This is because the yen typically weakens in a “risk-on” environment, amplifying the Australian dollar’s gains.

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