The Deputy Governor of the Reserve Bank of Australia, Andrew Hauser, revealed that the November Consumer Price Index data met expectations. As a result, interest rate cuts are not likely to happen anytime soon. Inflation is still above 3%, which is considered too high, leaving room for potential rate hikes in the February meeting. Currently, the AUD/USD is trading at 0.6723, with a slight increase of 0.03% today. The Australian Dollar (AUD) is impacted by many factors, including interest rates from the Reserve Bank of Australia (RBA), Iron Ore prices, the state of the Chinese economy, inflation levels, and Australia’s Trade Balance.

The Impact of RBA on Australian Dollar

The RBA influences the Australian Dollar by managing interest rates to keep inflation between 2-3%. When interest rates are high compared to other central banks, the AUD tends to rise, while low rates can weaken it. The health of the Chinese economy significantly affects the AUD, as China is Australia’s main trading partner. Strong growth in China generally increases the demand for the AUD. Iron Ore is one of Australia’s major exports, and its price directly impacts the AUD. Higher Iron Ore prices usually strengthen the AUD and improve the Trade Balance, which further supports the currency. On the other hand, a negative Trade Balance can weaken it. Since the Reserve Bank of Australia has indicated that rate cuts are not expected soon, we should rethink our short-term strategies. This means that derivatives predicting cuts to the cash rate in the near term are likely overvalued. Recent data shows inflation for December 2025 holding at 3.5%, signaling ongoing price pressures for the central bank. With a cautious outlook from the RBA, placing bets on the AUD/USD dropping below 0.6600 in the first quarter seems risky. Instead, we might want to consider selling out-of-the-money puts or structuring call spreads to take advantage of potential stability or a gradual increase in the currency’s value. Australia’s tight labor market, with an unemployment rate of 4.0% in December 2025, gives the RBA little incentive to ease policies soon.

Market Volatility and Commodity Prices

This situation feels reminiscent of much of 2025, when the market frequently tried to anticipate RBA policy changes that did not materialize. That period experienced a notable decrease in volatility for short-dated AUD options as the central bank held firm. We should expect a similar trend now, making short volatility strategies potentially appealing. In addition to interest rates, key commodity prices provide support to the Australian Dollar at current levels. Iron ore prices are holding steady around $135 per tonne, largely due to consistent demand from China. China’s recent Caixin Manufacturing PMI reading of 50.9 suggests ongoing modest expansion, which should sustain demand for Australian exports. With the February RBA meeting described as ‘live,’ there is a risk of a rate hike instead of a cut. This situation suggests caution for those who are aggressively short on the Aussie dollar leading up to the decision. Any positioning might favor strategies that limit downside risk if the RBA surprises with more hawkish tones. Create your live VT Markets account and start trading now.

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