The Westpac-Melbourne Institute Leading Index, which predicts future economic activity, showed a small rise in its growth rate. It increased to 0.12% in July from 0.01% in June, suggesting a slow and steady economic recovery. However, this recovery faces challenges due to falling commodity prices and a stronger Australian dollar. The job market also appears weaker, with other sectors lacking clear direction.

Australian Dollar Stability

The exchange rate of the Australian dollar to the US dollar remains steady at about 0.6494. The latest data from the leading index confirms our assessment of a stalled Australian economy. This slow recovery barely shows any movement, with the growth rate just above zero. This means we expect economic activity to stay below its long-term average for the rest of 2025. A significant challenge is the drop in commodity prices, which continues to affect the economy. This month, iron ore prices fell below $100 per tonne due to renewed concerns about demand from China. This decline impacts our national income and limits any potential strength in the Australian dollar. Moreover, the labor market is softening, which weakens a key support for the economy. The unemployment rate for July, released in mid-August 2025, rose to 4.2%, confirming a cooling trend. This slowdown in job growth will likely keep wage increases in check and consumer spending low.

Interest Rate Outlook

As inflation moves closer to the Reserve Bank of Australia’s (RBA) target range, with a Q2 figure of 3.1%, there is little urgency for the central bank to raise interest rates from the current 3.85%. We expect the RBA to maintain its cautious approach, which may limit any gains for the AUD/USD, currently hovering around 0.6450. Thus, selling out-of-the-money call options on the AUD/USD to collect premium seems wise, as a significant price rally seems unlikely. Looking back, this stagnant price behavior is similar to the range-bound market we experienced throughout most of 2023, when economic data lacked clarity. The current implied volatility on AUD options is low, indicating the market expects this sideways trend to continue. This low-volatility situation supports strategies that benefit from time decay and limited price changes, like short straddles. Create your live VT Markets account and start trading now.

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