The Australian Dollar (AUD) rose for the second day in a row against the US Dollar (USD). This follows cautious comments from Andrew Hauser of the Reserve Bank of Australia (RBA), who highlighted the unique challenges in monetary policy and stressed the need for tight conditions to control inflation. Since last year, economic recovery has led to demand slightly exceeding potential output. Easing trade tensions between the US and China have also helped the AUD. China has temporarily lifted its ban on some exports to the US until late 2026. In October, China’s Consumer Price Index (CPI) increased year-over-year, bouncing back from a prior drop. Meanwhile, the Producer Price Index (PPI) declined but not as much as expected. The AUD remains sensitive to news from China, a crucial trade partner for Australia.

US Dollar Stability

In the US, the Dollar Index is steady as Congress discusses a way to avoid a federal government shutdown. A reported agreement among Senate Democrats may fund federal departments until January. However, US consumer sentiment has dipped to a level not seen since mid-2022. In October, ADP Employment numbers exceeded expectations, and the ISM Services PMI also rose. China’s trade surplus increased in October, but not as much as analysts had predicted, while its overall trade balance narrowed slightly. Australia’s Trade Surplus shot up significantly in September, driven by an export boom. The AUD/USD is trading around 0.6520, showing short-term momentum is improving. The pair is above the nine-day Exponential Moving Average (EMA), with initial resistance at the 50-day EMA. On the downside, key support levels are at 0.6500, with additional backing near recent lows. The Australian Dollar has mixed strengths against other major currencies. Factors like interest rates, the health of the Chinese economy, and iron ore prices play a crucial role. If Australia continues to enjoy a positive trade balance and faces increased demand for iron ore, the AUD could strengthen. The Reserve Bank of Australia’s strong commitment to maintaining a tight monetary policy signals potential strength for the AUD. The RBA has held the cash rate at 4.35% for over a year, showing a firm dedication to controlling inflation, which has been stickier than in other developed countries. This ongoing hawkish approach suggests that buying options to profit from a rising AUD/USD, like call options, is a smart strategy.

Trading Strategy

The AUD is also supported by China, its main trading partner. Although some mixed signals from Chinese PMI data exist, the temporary lifting of export bans and a surge in iron ore prices above $130 per tonne provide solid support for the Australian currency. These trends hint at a potential stabilization in the Chinese economy, directly benefiting Australia’s trade balance and the Aussie dollar. On the flip side, the US Dollar seems weak as the combined effect of the Federal Reserve’s previous rate hikes impacts the economy. The drop in the University of Michigan Consumer Sentiment to 50.3 raises concerns, reminiscent of similar declines before the economic downturns of 2008 and the early 2000s. This drop in consumer confidence, along with rising job cuts, paints a bearish picture for the greenback. Given these factors, a wise move would be to buy AUD/USD call options with strike prices just above the 50-day EMA at 0.6535. This allows traders to benefit from a potential move toward the 0.6630 resistance level in the coming weeks. The clear differences in central bank policies and economic sentiment between Australia and the US support this bullish outlook. However, it’s essential to stay aware of the downside risks from China’s still-fragile recovery. To reduce the risk of loss from an unexpected downturn, traders might consider buying protective put options with a strike near the 0.6470 support level. This would provide a safety net if Chinese economic data disappoints and triggers a risk-off sentiment. Create your live VT Markets account and start trading now.

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