Strong jobs data from Australia has affected expectations for interest rate increases, but those expectations may be too high compared to actual inflation trends. Even though the AUD is performing well, the AUD/USD pair may be at risk. The AUD and NZD have led the G10 currencies since January, partly due to their low exposure to geopolitical issues and solid fiscal conditions. Local factors also contributed, as the unemployment rate unexpectedly dropped to 4.1%, thanks to a 65,000 increase in jobs, primarily in full-time positions.

Job Gains and Market Impact

This surge in employment resulted in a 12 basis point increase in the two-year AUD swap rate. Market expectations now forecast 15 basis points of rate hikes by February and 34 by June. However, this may be hasty, as upcoming CPI data could turn out to be less than what the Reserve Bank of Australia predicted. While we are cautious about continuing bets on AUD/USD, the Australian dollar is likely to do well against other currencies. Looking back to January 2025, we saw a similar scenario where a surprisingly strong jobs report lowered unemployment to 4.1%. Markets quickly anticipated rate hikes from the Reserve Bank of Australia, but those expectations proved premature when the following inflation data was softer than expected. This history shows that market reactions to job data can sometimes get ahead of actual inflation pressures. Today, we’re witnessing a similar trend as the latest labor data reveals unemployment has decreased to 3.8%, much lower than predictions. The two-year Australian government bond yield has risen as the market is now pricing in over a 70% chance of a 25 basis point hike at the RBA’s meeting in March. However, since global oil prices softened in late 2025, the upcoming inflation report may not support such a hawkish approach.

Opportunity for Derivative Traders

This gap presents an opportunity for derivative traders who expect inflation to fall short of the RBA’s forecasts. Selling out-of-the-money call options on AUD/USD could be a strategy for those anticipating a pullback if inflation results disappoint. Implied volatility for the Aussie dollar has risen to around 9.2% for one-month options, making option-selling strategies more appealing compared to December. We believe the Australian dollar will stay well-supported against other currencies, especially those with central banks leaning toward easier policies. For instance, the European Central Bank has hinted at potential rate cuts later this year, which contrasts sharply with the RBA’s more aggressive stance. This policy difference makes strategies like buying AUD/EUR call options appealing and less vulnerable to broader US dollar strength. Create your live VT Markets account and start trading now.

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