Australia’s unemployment rate increased to 4.5% in September, the highest since November 2021. This rise in unemployment has led to heightened expectations for further rate cuts by the Reserve Bank of Australia (RBA).
The AUD/USD dropped by 0.38% on Thursday, trading around 0.6490, dipping below the 0.6500 mark. The Australian Bureau of Statistics reported that employment change was 14.9K, missing forecasts of 17K, following 11.8K job losses in August.
Monetary Policies Impact
RBA Governor Michele Bullock mentioned a careful approach due to household spending and inflation. Assistant Governor Christopher Kent noted financial conditions are “less restrictive,” awaiting further data. An ING analyst suggested a rate cut might occur in December, pending inflation data due later in October.
The US Dollar remains subdued due to the partial government shutdown in the US and expectations that the Federal Reserve will maintain dovish monetary policy. Australian Dollar has shown strength against the US Dollar, according to a currency percentage change table. The heat map indicates the Australian Dollar’s performance against other major currencies.
With Australian unemployment hitting 4.5%, a level we haven’t seen since the post-pandemic recovery began in late 2021, the case for more rate cuts from the Reserve Bank of Australia is getting stronger. This confirms the trend of economic cooling we’ve observed since the aggressive rate hikes of 2023. For us, this solidifies a bearish bias on the Australian dollar heading into the final quarter of the year.
The RBA is holding back for now, waiting for the third-quarter inflation data before making its next move. This creates a period of tension, as we know the jobs market is weakening but the official inflation story is still pending. We should anticipate a significant spike in volatility around that inflation release later this month, as it will likely be the final trigger for a rate cut decision.
Market Reactions and Opportunities
Looking at the US dollar side, its own weakness from the government shutdown and a dovish Federal Reserve is capping the downside for the AUD/USD pair. This isn’t a simple case of Aussie weakness, but rather a contest between two currencies with loosening monetary policies. This environment suggests that while the direction for the Aussie may be down, the path will likely be choppy and volatile.
Given this setup, we see value in buying AUD/USD put options that expire after the inflation data release. This allows us to position for a potential sharp drop if inflation comes in soft, confirming a rate cut, while limiting our maximum loss if the data surprises to the upside. The current uncertainty is likely keeping option premiums reasonable, presenting a good risk-reward opportunity.
We should also look at cross-currency pairs to isolate the Australian dollar’s weakness more effectively. For example, considering a short AUD/NZD or short AUD/CAD position could be a cleaner trade. The central banks of New Zealand and Canada may not be as dovish as the RBA and the Fed, potentially offering a smoother downward trend for the Aussie.
