Insights 
VT 
The Australian Dollar has shown gains against the US Dollar, recovering from previous declines. Assistant Governor of the Reserve Bank of Australia, Sarah Hunter, mentioned a stronger-than-expected economy and potential inflation exceeding forecasts in the third quarter. The market remains uncertain due to narrow global economic conditions, but there’s an expectation of a consumer momentum dip in Q3.
China’s Consumer Price Index dropped by 0.3% in September, slightly below predictions, while the Producer Price Index fell by 2.3%, meeting expectations. US-China trade tensions persist, impacted by new trade restrictions and fees, which could influence the Australian Dollar due to Australia’s trading relationship with China.
US Dollar Index Challenges
The US Dollar Index faces challenges, trading around 98.90, following comments by Fed Chair Jerome Powell on an expected interest-rate reduction. The CME FedWatch Tool indicates a nearly 94% chance of an October rate cut. Australia’s Inflation Expectations rose to 4.8% in October, posing concerns over inflation surpassing Q3 expectations.
The AUD/USD trades near 0.6500 despite a bearish trend, with technical resistance at the nine-day EMA of 0.6532. A break below 0.6450 could lead to further decline. Key factors influencing the Australian Dollar include RBA interest rates, Chinese economic health, and Iron Ore prices. A positive trade balance bolsters the Australian Dollar.
Given the widening policy gap between a dovish US Federal Reserve and a cautious Reserve Bank of Australia, we see an opportunity for the Australian dollar to strengthen against the US dollar. The Fed is signaling a high probability of an interest rate cut this month, with the CME FedWatch Tool showing a 94% chance as of this morning. This contrasts sharply with the RBA, which remains concerned about persistent inflation.
The RBA’s cautious stance is backed by recent data from earlier this month showing annual inflation in Australia holding stubbornly at 3.6% in the September quarter. Furthermore, Australia’s labor market remains tight, with the unemployment rate as of September 2025 hovering near 4.1%, giving the central bank little reason to ease policy. These factors support the AUD, as Governor Bullock has recently highlighted ongoing concerns about services inflation.
US Economic Indicators
On the other hand, the US economy is showing signs of softening, which justifies the Fed’s dovish pivot. The most recent non-farm payrolls report showed a slowdown in hiring, and September’s CPI data indicated that US inflation moderated to 3.4% year-over-year. These figures strengthen Chair Powell’s case for lowering interest rates to support the labor market and economy.
This policy divergence suggests a strategy of buying call options on the AUD/USD to capitalize on potential upside. We should consider options with strike prices targeting the 0.6550 to 0.6600 range, expiring in late November or early December 2025. This allows us to profit from a potential rally while defining our maximum risk.
However, we must monitor risks related to China, Australia’s largest trading partner. The recent weak Chinese inflation data and renewed US-China trade tensions over shipping fees and rare earth minerals could create headwinds for the AUD. A slowdown in Chinese demand would negatively impact Australian exports and sentiment.
To hedge against this risk, purchasing out-of-the-money AUD/USD put options is a prudent move. A strike price around 0.6400, below the key support level noted on August 21, would provide protection against a sudden reversal. This defensive position would shield our portfolio if tensions escalate or Chinese economic data worsens unexpectedly.
Finally, the price of iron ore, a key Australian export, lends fundamental support to our view. Iron ore prices have remained resilient, trading above $115 per tonne through the first half of October 2025. This stability helps underpin the value of the Australian dollar and supports the case for a break above its current technical resistance levels.
