Insights 
VT 
AUD/USD rises by 0.40% on Thursday, trading around 0.6510, driven by interest in commodity-linked currencies. This comes as markets anticipate the US inflation report set for release on Friday.
The Australian dollar benefits from increasing commodity prices, with Oil and Gold showing particular strength. This occurs amid a tense geopolitical climate as the US considers new export restrictions on software products to China starting November 1.
Impact On The Australian Economy
These potential restrictions respond to China’s recent limiting of rare earth exports to the US, posing a challenge for the Australian economy, which relies heavily on exports to China. However, markets are optimistic about a diplomatic resolution following an upcoming meeting in Malaysia.
The main focus remains on the upcoming US Consumer Price Index (CPI) for September, delayed by the government shutdown. Expectations predict a rise to 3.1% YoY, up from 2.9% in August. These data points are pivotal for US monetary policy, with the Federal Reserve expected to cut interest rates next week.
In Australia, attention pivots to preliminary Purchasing Managers Index (PMI) data released later in the day. Meanwhile, a speech by RBA Governor Michele Bullock is also anticipated early on Friday. The Australian Dollar is notably strong against the Japanese Yen according to the currency exchange heat map.
Market Volatility Ahead
We are watching tomorrow’s US inflation report very closely, as it is the most critical event for the coming weeks. Economists expect a rise to 3.1%, which will directly influence the Federal Reserve’s decision on interest rates next week. This makes the current strength in AUD/USD above 0.6500 feel quite fragile.
Despite the anticipated rise in inflation, market pricing suggests a near certainty of a Fed rate cut. The CME FedWatch Tool is showing an 88% probability of a 25-basis-point cut, which would be the first move down after rates held steady for most of 2025. This expectation is a major factor weighing on the US dollar and supporting the Aussie.
On the Australian side, the currency is getting a significant boost from rising commodity prices. Iron ore, a vital export, has pushed above $130 per tonne, a level we have not seen since early 2024. However, we cannot ignore the risk from the US-China trade talks this weekend, as Australia’s economy is highly sensitive to Chinese demand.
This combination of a key inflation report and a crucial diplomatic meeting points to a spike in volatility. We believe setting up trades that profit from a large price swing, regardless of direction, could be a prudent strategy. An unexpected inflation number or a breakdown in trade talks could easily move the market by more than 1% in a single session.
For those with a directional view, buying call options on AUD/USD would be a way to bet on a dovish Fed and successful US-China negotiations. Conversely, buying put options offers a hedge against a hawkish surprise from the inflation data or a return to trade-war rhetoric. Looking back at the market swings during the 2018-2020 trade disputes, we know how quickly sentiment can turn negative.
