The Australian Dollar (AUD) has dropped due to rising trade tensions between the US and China and expectations that the Reserve Bank of Australia (RBA) will cut rates in November. After September’s employment data, the likelihood of a rate cut surged from 50% to 85%. As a result, the AUD/USD pair has continued to fall, greatly affected by Australia’s strong trade ties with China. China plans to regulate rare earth exports, which could disrupt the global supply chain. While the US criticized these plans, it also left the door open for negotiations. At the same time, the US Dollar weakened because of a government shutdown and speculation about interest rate cuts. The US dollar has dropped for four consecutive sessions, with the government shutdown prolonging as the Senate remains stalled.

Fed Rate Cut Perspectives

Fed Governor Christopher Waller is in favor of another interest rate cut. In contrast, newly appointed Fed Governor Stephen Miran is pushing for aggressive cuts by 2025. Right now, there’s a 97% probability of a Fed rate cut in October and an 83% chance of another cut in December. China’s Consumer Price Index (CPI) fell by 0.3% year-on-year in September, and monthly inflation figures were weaker than expected. The Producer Price Index (PPI) also fell 2.3% year-on-year, matching forecasts. The Australian dollar is facing tough challenges, creating chances for out-of-the-money put options. Increasing tensions between the US and China regarding rare earth minerals and disappointing economic data from China are putting pressure on the AUD. Domestically, the strong expectation of a rate cut from the RBA in November adds to this downward trend. Recent data from the Australian Bureau of Statistics revealed that retail sales growth slowed to just 0.2% month-on-month in September, falling short of predictions. This confirms the weak consumer momentum that the RBA has expressed concern about, making a rate cut at the next meeting more likely. With markets anticipating an 85% chance that the RBA will lower its cash rate to 3.40% in November, traders might consider buying AUD/USD put options. Options that expire in late November with a strike price around 0.6400 could effectively capitalize on a potential drop following the central bank’s decision. The rising uncertainty also suggests that implied volatility might increase, making this a good time to take such positions.

Potential Strategies for Traders

This situation resembles what happened in 2019 when soft employment and growth data led to RBA rate cuts. During that time, the AUD/USD pair steadily decreased as monetary policy became more lenient. History shows that when the RBA begins cutting rates, the most likely direction for the currency is downward. The external environment isn’t helping either, as China’s economy is showing deflation signs. Additionally, iron ore futures have fallen below $110 per tonne this month due to worries about steel demand in China, negatively impacting a key source of export revenue for Australia. As long as this continues, the intrinsic value of the Australian dollar will remain under pressure. Although the US dollar faces challenges from the ongoing government shutdown and anticipated Federal Reserve rate cuts, the negative sentiment towards the Aussie seems stronger. The mix of domestic weakness and external risks builds a stronger bearish case for the AUD. Thus, it’s essential to focus on the specific vulnerabilities affecting the Aussie. Given these circumstances, shorting the Australian dollar against a safe-haven currency like the Swiss franc could be a smart strategy. The AUD/CHF cross typically declines sharply during times of global uncertainty. Selling AUD/CHF futures or buying puts on the pair provides a way to hedge against the risks of an RBA rate cut and worsening US-China relations. Create your live VT Markets account and start trading now.

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