The Australian Dollar increased as the Reserve Bank of Australia addressed challenges in its policies, focusing on strict measures to control inflation. A temporary lift by China on exporting dual-use items to the US also boosted the Australian currency. Meanwhile, the US Dollar remained stable with the US Senate moving towards approving government funding, hinting at a possible end to the shutdown.

Australia’s Monetary Policy Phase

The Australian Dollar’s strength continued for a second session, aided by comments from RBA Deputy Governor Hauser. He described the current monetary policy situation in Australia as challenging, as demand is outpacing potential output. This situation leaves little opportunity for monetary easing without increasing inflation. Improving relations between the US and China have further supported the Australian Dollar. China’s recent lifting of the export ban on dual-use items, such as gallium and antimony, could influence this dynamic. Since China is a major trading partner for Australia, shifts in its economy can significantly impact the AUD. In September, Australia’s Trade Surplus expanded with exports up by 7.9% from the previous month. The AUD/USD trading pair shows promise for further growth while remaining above important support levels. On that day, the Australian Dollar was particularly strong against the Japanese Yen. Key factors affecting the AUD include interest rates, China’s economic status, and iron ore prices. The Reserve Bank of Australia’s careful approach indicates interest rates will stay high, which supports the Australian Dollar’s strength. Earlier this month, the RBA maintained its cash rate at 4.35% but emphasized its commitment to fighting inflation. Futures markets are now predicting a higher likelihood of another rate hike by early 2026, a significant change from just weeks ago. Conversely, the US economy is showing signs of slowing down, which may weaken the US Dollar. The Federal Reserve has held steady since mid-2023, and recent weak consumer sentiment data suggests that a rate cut might be next. This widening gap in interest rate expectations between Australia and the US makes the AUD more appealing.

China’s Impact on Australian Trade

We are also witnessing positive developments from China, Australia’s largest trading partner. The temporary lifting of the export ban on crucial materials to the US is a positive step that eases global trade tensions. This change has contributed to rising iron ore prices, an essential Australian export, which recently climbed back above $130 per tonne. This environment indicates a potential for further strength in the AUD/USD in the upcoming weeks. Traders might consider buying call options on the AUD/USD to take advantage of a possible move toward the 0.6630 resistance level. Implied volatility has been rising, so employing strategies like bull call spreads could help offset the costs of these options. However, it is important to monitor technical levels for signs of a reversal. A significant drop below the 0.6500 psychological level could indicate that momentum is weakening. Any negative surprises from Chinese economic data could quickly alter the positive outlook for the Australian Dollar. Create your live VT Markets account and start trading now.

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