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Fed Officials Views
The Australian Dollar declines as the Reserve Bank of Australia (RBA) holds its policy rate steady at 3.6%. RBA Governor Michele Bullock underscores policy stability amidst persistent inflation, with third-quarter CPI rising 1.3%, surpassing the forecasted 1.1%.
The AUD/USD pair falls by 0.60%, trading around 0.6500. The pause by the RBA, alongside a stronger US Dollar, influences this movement, as expectations for further Federal Reserve rate cuts diminish. The US Dollar Index nears a three-month high around 100.00.
Fed officials, including Lisa Cook and Austan Goolsbee, express mixed views on inflation and labour market dynamics. Markets reduce the likelihood of a 25-basis-point Fed rate cut in December to 70%, down from over 90% a week prior.
Market focus shifts to upcoming Australian PMI data for further economic insights. The Australian Dollar performs strongly against the New Zealand Dollar despite its overall decline. A currency heat map indicates the AUD’s varied performance against major international currencies today.
Ghiles Guezout, a Market Analyst with expertise in investments and trading, provides this analysis. He leverages both fundamental and technical analysis to assess market trends and opportunities.
RBA and Fed Divergence
The divergence between the Reserve Bank of Australia and the US Federal Reserve is becoming much clearer. With the RBA holding its rate at 3.6% and the Fed signaling it will remain cautious, the path of least resistance for the AUD/USD pair is downwards from its current 0.6500 level. We should expect this policy gap to be the main driver for the next few weeks.
We are seeing the RBA hesitate despite Australia’s own recent data showing annual inflation still running hot at 5.3%, well above their target. Governor Bullock’s comments about policy being “close to neutral” suggest a high tolerance for this inflation, weakening the case for holding the Aussie dollar. This stance seems overly dovish when compared to other central banks.
Adding to the pressure, recent data from China, Australia’s largest trading partner, showed October industrial production grew by only 4.1%, missing expectations of 4.5%. This slowdown in China directly impacts demand for Australian exports and puts a cap on any potential strength for the AUD. We saw a similar dynamic play out through much of 2024, where disappointing Chinese data consistently weighed on the currency.
Meanwhile, the US Dollar is supported by a robust economy, with the October Non-Farm Payrolls report showing a solid 190,000 jobs were added last month. This strength is why markets have reduced the odds of a Fed rate cut in December to 70%, keeping US Treasury yields attractive. The US Dollar Index is reflecting this sentiment by hovering near its three-month high.
This creates a significant yield differential, with the US Fed Funds Rate at 4.75% compared to the RBA’s 3.6%. This difference makes it appealing to borrow in Australian Dollars and invest in US Dollars, a trade that will continue to pull the AUD/USD pair lower. This setup is reminiscent of the market environment in late 2023, which heavily favored the dollar.
For traders, this signals an opportunity to position for further downside in AUD/USD. Buying put options with a strike price around 0.6400 could be a prudent strategy, targeting a move towards the 0.6350 support level seen earlier this year. This approach allows us to capitalize on the expected decline while managing risk.
The upcoming Australian PMI data will be the next key indicator to watch. While a surprisingly strong reading might cause a temporary bounce, the broader trend of US economic outperformance is likely to dominate. We should view any short-term Aussie strength as an opportunity to enter new short positions at a better price.
