The Reserve Bank of Australia (RBA) decided to keep the cash rate unchanged at 3.60% during its meeting on November 4. This decision matched what the market expected. In its statement, the RBA noted a small rise in inflation pressures, even though unemployment has gone up. The bank observed that the labor market is tight, with businesses struggling to fill job openings, despite adjusting growth forecasts. Governor Bullock expressed caution about making further rate cuts due to economic uncertainties, keeping future options flexible. She mentioned that the stability in the labor market may not be fully reflected in the unemployment data. She also pointed out that the effects of previous rate cuts are still unfolding, highlighting the need to stay alert for potential imbalances in demand and supply. The meeting confirmed that the RBA is likely to stay on hold for a while, with the labor market’s performance being a crucial factor. A sudden rise in unemployment could lead to faster easing, but global financial stability may help support the Australian economy. There’s uncertainty about future rate hikes, and the central bank is unlikely to pursue those soon. With the RBA maintaining the cash rate at 3.60%, we can expect a phase of stability. The RBA is weighing the recent Q3 inflation rate of 3.9% against a rise in the October unemployment rate to 4.3%. This suggests that current policies will remain in place, creating a neutral environment for traders in the near term. Given this outlook of extended stability, we expect volatility in the Australian dollar to decrease in the coming weeks. A potential strategy could be to sell short-dated AUD/USD options strangles to take advantage of the currency market’s current indecision as it waits for clearer economic signals. However, Governor Bullock has pointed out significant risks ahead, indicating that this quiet period may not last. The aggressive rate hikes in 2022 and 2023 remind us how quickly the RBA can change course if new data emerges. To be prepared for any surprises, buying longer-dated volatility through three or six-month options might be wise, allowing for a strong position if the labor market worsens suddenly. The main risk for lowering rates is a further decline in employment, especially as the latest ABS data shows job vacancies down 5% from the last quarter. On the other hand, a positive surprise could come from improving global financial conditions, particularly since the US Federal Reserve and ECB have indicated they are finished with rate hikes. Interest rate swaps suggest there won’t be much action from the RBA in the next six months, which could create opportunities if either of these risks develops sooner than expected.

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