Insights 
VT 
Impact on the Australian Dollar
The Australian Dollar has fallen to its lowest levels in over a month against the US Dollar. This drop follows US President Donald Trump’s threat of escalating tariffs on Chinese imports, stoking fears of a renewed trade conflict with China.
Australia’s close trade connections with China intensified the impact on the Australian Dollar. Traders are reducing holdings of risk-sensitive currencies as a precaution. The AUD/USD is seen around 0.6484, showing a decline of nearly 1.0% for the day, heading towards a loss for the week.
Concurrently, the US Dollar itself weakened against major currencies. Trump’s statements have negatively affected the economic outlook for the US, impacting trust in US holdings. The US Dollar Index slipped by 0.38%, moving away from a two-month high, and stands around 99.00.
Trump accused China of introducing export controls to disrupt markets and hinted at increased tariffs as a possible response. The plan to meet China’s President Xi Jinping at the upcoming APEC summit is now in doubt.
Compounding concerns, an ongoing US government shutdown prolongs uncertainty in global markets. This stalemate blocks key data releases and raises questions about federal expenditures. Federal worker layoffs have started, as confirmed by Trump’s Budget Director.
The Path Ahead for Traders
We are seeing a familiar pattern emerge that echoes the trade disputes from the Trump administration era. The Australian dollar’s sensitivity to US-China relations is once again a major factor, as any hint of tariffs or export controls from either side immediately pressures the currency. This historical precedent suggests that traders should anticipate heightened volatility in the AUD.
Right now, renewed friction over semiconductor technology is creating a similar risk-off environment. Consequently, we’ve seen the AUD/USD slip from over 0.68 just last month to around 0.6650 this week, mirroring the sharp declines seen in the past. This downturn comes despite the Reserve Bank of Australia holding interest rates steady at its last meeting.
The fundamental exposure remains significant, as recent data from the Australian Bureau of Statistics shows that through August 2025, exports to China still accounted for nearly 32% of Australia’s total exports. Iron ore prices, a key driver for the Aussie, have reflected this nervousness, with futures on the Dalian Commodity Exchange falling over 8% in the past three weeks from $118 to around $108 per tonne. This makes the AUD particularly vulnerable to any further negative headlines.
For derivative traders, this environment signals a clear opportunity to buy volatility. Implied volatility on one-month AUD/USD options has already ticked up from 9% to nearly 12% in recent days, indicating the market is pricing in larger-than-usual price swings. We believe positioning for this uncertainty through long straddles or strangles could be a prudent strategy.
Given the clear downside risk stemming from these trade tensions, buying AUD/USD put options offers a direct way to position for further weakness. We are also watching the AUD/JPY cross, which fell sharply during previous risk-off episodes as traders sought the safe-haven yen. Looking back, the AUD was weakest against the JPY during similar events, making it a key pair to monitor for bearish positioning.
However, the US dollar itself is facing headwinds from mixed signals on inflation from the Federal Reserve, complicating a simple short AUD/USD trade. This dynamic, where both currencies could weaken, further supports using options to define risk. It allows traders to capitalize on a directional move in the Aussie while hedging against unpredictable shifts in the dollar’s strength.
