The Australian labor market report for October showed some surprisingly good news. More than 40,000 new jobs were added, which significantly lowered the unemployment rate. This positive change helped offset last month’s sharp increase in unemployment. The likelihood of an interest rate cut in December is low, especially with inflation rates going higher than expected. Following the report, the Australian Dollar slightly rose against the US Dollar.

Slowing Economy Despite Strong Job Growth

Even with the positive job numbers, the economy is slowing down, and inflation remains high. This could limit the Australian Dollar’s ability to grow in the near future. The stronger October jobs report, which indicated over 40,000 new jobs, strengthens our belief that the Reserve Bank of Australia will likely keep rates steady in December. With the unemployment rate falling back to 3.8%, an interest rate cut seems very unlikely. Current market pricing shows that overnight index swaps suggest there’s now less than a 10% chance of a rate cut at the next meeting. This situation provides a temporary support level for the Australian Dollar, making any short-term drops in AUD/USD attractive for buyers in the spot market. For options traders, the lower likelihood of a near-term rate cut makes selling out-of-the-money AUD puts for December a good way to earn premium. The immediate downside risk has clearly decreased.

High Inflation and Slowing Growth

Nonetheless, we must consider the wider economic context, which limits the Aussie’s potential. While the job market is strong, the latest data shows that Q3 GDP growth was only 0.2%, and recent retail sales have declined. This confirms that the economy is cooling, even though last quarter’s inflation rate was high at 4.2%, well above the RBA’s target range. This mix of high inflation and slow growth creates a challenging environment, likely keeping significant rallies in the AUD to a minimum. We noticed a similar situation in 2023, where a hawkish RBA couldn’t sustain AUD strength because of global growth worries. Thus, strategies that benefit from a stable market, like selling strangles or iron condors on AUD/USD, should be considered in the weeks ahead. The main risk to this outlook is how global sentiment, especially economic data from China, will change. China’s latest manufacturing PMI was just above contraction at 50.4, suggesting that external demand for Australian commodities may not be strong enough to boost the AUD significantly. We need to keep an eye on any signs of a slowdown in China, as it would heavily impact the currency, regardless of the RBA’s decisions. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now