The Australian Dollar (AUD) has risen against the US Dollar (USD) after the TD-MI Inflation Gauge reported a 0.4% increase in September, following a 0.3% drop in August. Yearly inflation rose to 3% from 2.8%, presenting challenges for the Reserve Bank of Australia’s (RBA) target range of 2–3%. In September, the RBA kept its Official Cash Rate (OCR) at 3.6%. The bank is noting ongoing inflation, especially in market services, and a tight job market. Traders are looking forward to speeches from RBA officials this week for more policy guidance.

US Dollar Index and Possible Fed Rate Cuts

The US Dollar Index (DXY) is hovering around 98.00. However, possible interest rate cuts from the US Federal Reserve (Fed) in October and December may impact its strength. A government shutdown raises concerns for the USD, delaying crucial economic reports like September job data. In September, US private sector jobs fell by 32,000, with a 4.5% growth in annual pay. Job openings edged up to 7.23 million in August, but hiring rates dropped to 3.2%. Australia’s trade surplus fell sharply to 1,825 million MoM in August, with exports decreasing by 7.8%. The AUD/USD pair is around 0.6610, with technical analysis showing a positive trend in an upward channel. Key factors affecting the AUD include RBA interest rates, Iron Ore prices, and how well the Chinese economy is doing. A stronger Chinese economy enhances Australian exports and AUD value. Additionally, Iron Ore prices significantly impact Australia’s trade balance. RBA interest rate decisions, Iron Ore prices, and economic conditions in China are crucial for determining the AUD’s direction. Given the situation, we should prepare for a stronger Australian Dollar against a weakening US Dollar. Australian inflation remains sticky, with the latest TD-MI gauge for September showing a 3.0% annual increase, right at the RBA’s target range. This pressures the RBA to stay assertive, even after holding rates steady at 3.6% last month. On the other hand, the US Federal Reserve seems prepared to cut interest rates, with markets indicating a 95% chance of a cut later this month. This expectation arises from weak economic signals, including the unexpected drop of 32,000 private payrolls in the September ADP report. The ongoing US government shutdown adds to the uncertainty, delaying vital economic data and affecting the dollar.

Supporting the Aussie Dollar

We’ve seen this trend before, especially in late 2019 when a slowdown in the US job market led to a series of Fed rate cuts. The current hiring rate, now at its lowest since June 2024, reflects that type of slowdown. This historical context supports the expectation of a more dovish Fed soon. For the Aussie dollar, demand from China for key exports appears strong for now. Recent customs data from China revealed a slight rise in iron ore imports, with prices remaining stable above $115 per tonne. This helps alleviate concerns from Australia’s narrowed trade surplus. Technically, the AUD/USD pair is in a clear upward channel, suggesting the bullish trend is ongoing. The Relative Strength Index is above 50, indicating potential for further gains. We should view the current level around 0.6610 as a good entry point for bullish positions. For derivative traders, this outlook favors buying AUD/USD call options with strike prices near the 12-month high of 0.6707. Alternatively, selling put options with strike prices below the immediate support level of 0.6600 could be a practical strategy to earn premiums. These positions stand to profit from the anticipated rise of the currency pair due to differing monetary policies. We must also manage risks, as a sudden resolution to the US government shutdown or unexpectedly strong job data, once released, could lead to a quick reversal. The lower boundary of the upward channel, around 0.6550, is a critical support level. A drop below this would indicate a shift in the current trend and prompt us to reevaluate our bullish outlook. Create your live VT Markets account and start trading now.

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