Reserve Bank of Australia Assistant Governor Brad Jones stated that markets are currently underpricing geopolitical risks. He also noted that global valuations appear to be complacent and detected early signs of fragmentation in central bank gold reserves.
The AUD/USD rate stands at approximately 0.6530, showing a minor increase of 0.01% on the day. The Reserve Bank of Australia (RBA) manages monetary policy and sets interest rates to maintain price stability, aiming for an inflation rate of 2-3%.
Impact of Economic Data on AUD
Moderately higher inflation can lead to increased interest rates by central banks, attracting capital inflows and boosting demand for the Australian Dollar. Economic data, such as GDP and employment figures, can influence the value of the AUD by reflecting the country’s economic health.
Quantitative Easing (QE) involves the RBA buying assets to inject liquidity into the economy, which can weaken the AUD. Conversely, Quantitative Tightening (QT) is the process of reducing asset purchases and can boost the AUD, as it typically follows an economic recovery and rising inflation.
We should take the Reserve Bank of Australia’s warning seriously, as it suggests markets are ignoring major potential shocks. Volatility, as measured by the VIX index, has been trading below 14 for most of the past quarter, making protective options contracts unusually cheap. This environment presents a clear opportunity to hedge against complacency before the rest of the market wakes up to these risks.
Geopolitical and Market Risks
The underpricing of geopolitical risk seems particularly acute when we consider the ongoing tensions in key global shipping lanes and unresolved trade disputes. We saw a similar period of calm market conditions in late 2021 before inflation and central bank actions triggered major repricing events throughout 2022. History shows that these quiet periods often precede significant market turbulence.
Current global equity valuations support this view of complacency, with the S&P 500 having gained over 15% year-to-date in 2025, pushing its forward price-to-earnings ratio above 22. Such elevated levels make markets particularly vulnerable to a correction if a geopolitical event finally rattles investors. Therefore, buying put options on major indices could be a prudent strategy, as their pricing does not seem to reflect this high valuation risk.
The note about central banks buying gold is a crucial piece of the puzzle, pointing to a longer-term trend of de-dollarization. Central banks, particularly in Asia, have been record buyers of gold since 2022, a trend that continued through 2024 and into this year as they diversify away from traditional reserve currencies. This action by “smart money” suggests that holding assets like gold, or currencies from stable commodity-producing nations, could provide a buffer in the coming weeks.
For those focused on the Australian dollar, the situation is complex. While Australian inflation remains stubbornly above the RBA’s target, coming in at 3.4% in the last quarterly report for 2025, the AUD is still highly sensitive to global risk sentiment. A global shock could easily overwhelm domestic factors and push AUD/USD lower, so traders might consider option strategies that profit from a potential spike in currency volatility.
