The Australian labour market report for October revealed unexpected positive results. Over 40,000 new jobs were created, substantially reducing the unemployment rate. This helped negate the previous month’s sharp rise in unemployment.
The chances of an interest rate cut in December are low, with inflation rates also exceeding expectations. The Australian Dollar saw a slight increase against the US Dollar following the report.
Slowing Economy Despite Strong Labor Market
Despite the positive employment data, the economy is slowing, while inflation remains elevated. This situation may restrict the Australian Dollar’s growth potential in the foreseeable future.
The stronger-than-expected October jobs report, which showed over 40,000 new jobs were created, has solidified our view that the Reserve Bank of Australia will not cut rates in December. With the unemployment rate dropping back to 3.8%, this data makes an interest rate cut very unlikely. Market pricing reflects this, as overnight index swaps are now implying less than a 10% chance of a rate cut at the next meeting.
This provides a temporary floor for the Australian Dollar, so we should consider any short-term dips in AUD/USD as potential buying opportunities in the spot market. For options traders, the reduced probability of a near-term dovish surprise means selling out-of-the-money AUD puts for the December expiry could be a viable strategy to collect premium. The immediate risk to the downside has clearly diminished.
High Inflation and Slowing Growth
However, we cannot ignore the broader economic picture, which limits the Aussie’s potential. While the labor market is holding up, the latest data showed that Q3 GDP growth was a sluggish 0.2%, and recent retail sales figures have been contracting. This confirms the economy is cooling even as the last quarterly inflation report came in hot at 4.2%, well above the RBA’s target band.
This mix of high inflation and slowing growth creates an unfavorable environment that will likely cap any significant rallies in the AUD. We saw a similar dynamic back in 2023, where a hawkish RBA failed to produce sustained AUD strength due to global growth concerns. Therefore, strategies that profit from a range-bound market, such as selling strangles or iron condors on AUD/USD, should be considered for the weeks ahead.
The key risk to this view is how global sentiment evolves, particularly concerning economic data from China, our largest trading partner. China’s latest manufacturing PMI reading was barely in expansionary territory at 50.4, indicating that external demand for Australian commodities may not be strong enough to drive the AUD significantly higher. We should watch for any signs of further slowdown there, which would weigh heavily on the currency, regardless of the RBA’s actions.
