Insights 
VT 
The Reserve Bank of Australia (RBA) held the cash rate steady at 3.60% during its 4 November meeting, aligning with market expectations. The policy statement suggested a slight increase in inflationary pressure, despite an uptick in unemployment rates. The central bank noted tightness in the labour market, with businesses facing difficulties in filling vacancies, even as growth forecasts were adjusted.
Governor Bullock remained cautious about further rate cuts amid economic uncertainties, keeping options open for future adjustments. She cited stability in the labour market that may not be fully captured by unemployment data. She warned of the incomplete impact of previous rate cuts, stressing vigilance over potential demand-supply imbalances.
Prolonged Pause Expected
The meeting reinforced expectations of a prolonged pause by the RBA, with the labour market’s performance being a pivotal factor. A sudden increase in unemployment could prompt more aggressive easing, but global financial stability might support the Australian economy. There is uncertainty about future rate hikes, with the central bank not likely to consider such moves shortly.
With the Reserve Bank of Australia holding the cash rate at 3.60%, we see a period of temporary stability ahead. The RBA appears balanced, weighing the latest Q3 inflation figure of 3.9% against the recent uptick in the October unemployment rate to 4.3%. This suggests policy will remain on hold, creating a neutral environment for traders in the immediate term.
Given this outlook for an extended pause, we expect implied volatility in the Australian dollar to decline in the coming weeks. A potential strategy is to sell short-dated AUD/USD options strangles to capitalize on a range-bound currency market. This approach would benefit from the market’s current state of indecision as it awaits a clearer signal from economic data.
Potential Risks Ahead
However, Governor Bullock has flagged significant risks on the horizon, meaning this quiet period may not last. We recall the aggressive rate hikes of 2022 and 2023, which show how quickly the RBA can pivot when data changes. To prepare for a potential shock, buying longer-dated volatility through three or six-month options could be prudent, positioning for a breakout if the labor market deteriorates sharply.
The key risk for a downward move in rates is a further weakening in employment, as the latest ABS data showed job vacancies are already down 5% from the last quarter. Conversely, an upside surprise could come from easing global financial conditions, especially as the US Federal Reserve and ECB have signaled they are done hiking. Interest rate swaps are pricing in very little RBA action over the next six months, which could present an opportunity if either of these risks materializes faster than expected.
