An important meeting is coming up between US Treasury Secretary Scott Bessent and China’s Vice Premier He Lifeng in Malaysia. Increased tensions between the US and China could affect Australia’s economy, especially since Australia relies heavily on exports to China.

Focus on Australia’s Q3 CPI Data

All eyes are on Australia’s Q3 CPI data, which will be released on October 29. Inflation means the general rise in prices of goods and services. Headline inflation measures changes over time, while core inflation excludes food and fuel. The CPI tracks how prices change, and higher inflation can increase a currency’s value, while lower inflation can decrease it. The AUD/USD exchange rate is currently stable around 0.6510, indicating that there is a lot of energy building up ahead of key events. This kind of stability often leads to strong price movements, so holding a single directional view can be risky. The market is waiting for the upcoming US Consumer Price Index (CPI) data to decide its next step. There is an expectation that US inflation will rise to 3.1%. This creates a tense environment, especially since recent job data showed wage growth stubbornly high at 0.4% month-over-month. If the results meet or exceed expectations, the US Dollar could rise and push the AUD/USD below its recent support level of 0.6473. We should prepare for increased volatility following this release. For traders dealing in derivatives, this situation indicates that options prices might be undervalued given the upcoming events. Implied volatility on one-week AUD/USD options has risen to 9.8% from 8.5% earlier this week, reflecting growing anticipation. Strategies that capitalize on sharp price movements in either direction could be wise as we head into the weekend.

Pressure from Ongoing Trade Tensions

The Australian dollar is also facing pressure from renewed trade tensions with China, similar to what occurred from 2018 to 2020. The recent US export controls on software are a serious escalation, and the meeting in Malaysia is unlikely to produce quick solutions. This uncertainty tends to weigh down the Australian dollar, impacting sentiment due to its reliance on trade with China. This situation is already influencing commodity markets, which are crucial for Australia’s economy. Iron ore futures, Australia’s biggest export, have fallen nearly 4% this month to $112 per tonne, following weak Chinese industrial data released last week. Ongoing tensions between the US and China will likely reduce demand further, limiting any potential gains for the AUD. Additionally, Australia’s Q3 CPI data is due on October 29. Currently, the market believes there is a 60% chance of one final rate hike from the Reserve Bank of Australia in November. This probability will change significantly based on the inflation report. A surprisingly high Australian CPI figure next week could counter the negative sentiment and spark a rally in the AUD/USD pair. Create your live VT Markets account and start trading now.

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