AUD/USD was around 0.7070 on Monday, up 0.33% on the day after sliding to about 0.7024, its weakest level in nearly two months. The move came as markets weighed the policy outlook in Australia and the US, following a run of firm US labour data. The Reserve Bank of Australia kept a hawkish bias in focus, underpinning the Australian Dollar even as the US Dollar had been supported after the May jobs report.
The US economy added 172K Nonfarm Payrolls in May versus expectations of 85K, while the prior month’s figure was revised higher. Rate pricing shifted accordingly, with the CME FedWatch tool implying a 38% probability of a 25-basis-point hike in September, up from 22% a week earlier. Still, the US Dollar Index eased towards 99.90 after reaching roughly 100.20, and waning geopolitical tension also reduced demand for safe-haven currency exposure, helping the pair stabilise.
Tug-Of-War Between RBA and Fed Policy Drivers
We see the AUD/USD pair has found solid footing near the 0.7024 level after its recent two-month low. This rebound suggests a battle is underway between the strong US jobs data and the Reserve Bank of Australia’s firm stance on inflation. In the coming weeks, we expect this tug-of-war to keep the pair volatile.
We believe the RBA’s hawkish position provides a floor for the currency, especially as Australia’s most recent quarterly inflation data showed a stubborn 4.0% annual increase. This supports Governor Bullock’s statements and should limit any significant downside for the Aussie dollar. Therefore, we would be cautious about taking on large short positions at these levels.
Volatility Risks and Positioning Strategies
On the other side, the US labor market continues to defy expectations, with the 172K jobs added last month reinforcing the case for a restrictive Federal Reserve. With US inflation data due out this week, any hot reading could quickly push the 38% chance of a September rate hike even higher. This makes us consider buying put options to hedge against a sudden drop in AUD/USD if US data surprises to the upside.
The recent easing of geopolitical tensions has dampened demand for the safe-haven US dollar, providing a lift for the Aussie. However, we see this as a fragile calm that could quickly reverse, which introduces uncertainty. With the VIX index having fallen to a yearly low of 12.5, we think buying options is attractively priced to position for a potential spike in volatility in either direction.
