The Australian Dollar has fallen against the US Dollar, now trading at about 0.6547. This change is driven by safe-haven flows to the USD, influenced by recent tariff threats from the US. US President Trump announced a plan to impose 30% tariffs on imports from Europe and Mexico. He also warned of severe tariffs on Russia and possible additional tariffs on countries, including China and India, that buy Russian oil, unless a peace deal is reached in Ukraine within 50 days.

NATO Allies and Military Equipment

Trump, with NATO Secretary-General Mark Rutte, revealed plans to sell a large amount of US military equipment to European allies for Ukraine. Rutte noted that NATO members like Germany and Canada would help deliver these advanced military systems. The tough US trade approach has raised concerns about international trade and the demand for commodities. The Australian Dollar is particularly sensitive to geopolitical issues due to its ties with China and commodities. Fears about supply chain disruptions from potential secondary sanctions have added to the pressure on the Australian Dollar. Upcoming US inflation data, such as the Consumer Price Index on Tuesday and the Producer Price Index on Thursday, could affect the Federal Reserve’s monetary policy outlook. Traders will keep a close eye on these reports for signs of market trends. Given these circumstances, we see the current situation as more than just a passing concern; it’s a shift that favors the strength of the US Dollar and ongoing market turbulence. The actions taken by the former president and reinforced by his NATO counterpart follow a familiar pattern. Thus, we are adjusting our trading strategies to benefit from the anticipated effects on the Australian Dollar in the coming weeks. The key takeaway for traders is not just the direction of the market but the increasing speed of changes, making volatility a highly sought-after commodity.

Market Volatility and Strategy

Right now, our focus is on the rising implied volatility. The market’s fear gauge, the VIX, has surged over 15% recently, now trading above 15 in response to these geopolitical events. Specifically, one-month implied volatility on AUD/USD options has risen to around 10%, compared to quieter periods below 8%. This increase makes purchasing options more expensive, requiring more strategic approaches. We aren’t merely buying puts; we are building bearish positions that factor in this new cost. For example, we prefer put spreads, like buying the 0.65 puts while also selling the 0.63 puts to lower our entry price for a planned move down. This approach is based on recognized patterns. During the intense trade conflict of 2018-2019, the Australian Dollar dropped from above 0.73 to below 0.67 as risk aversion took hold. The currency’s sensitivity to its largest trading partner has been well documented. With threats now looming over China regarding its relationship with Russia, this old concern is resurfacing. We can already see the impact in key commodity markets; iron ore futures on the Singapore Exchange have struggled to maintain the $105 per tonne level, signaling worries about Chinese industrial demand if secondary sanctions happen. While geopolitical events capture headlines, the upcoming US inflation data serves as a key foundation for our strategy. The last core Consumer Price Index reading was a stubborn 3.6% year-over-year. If Tuesday’s number does not show significant improvement, it will strengthen the Federal Reserve’s “higher for longer” approach to interest rates. This reinforces the US Dollar’s yield advantage over the Aussie, creating a significant challenge. We are prepared for a situation where the data supports the US Dollar’s safe-haven appeal, possibly pushing the AUD/USD down to test the 0.64 support level, which it approached earlier this year. For those with Australian asset exposure, this is an essential time to hedge currency risk by selling AUD/USD futures contracts before volatility increases further. Create your live VT Markets account and start trading now.

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