The Reserve Bank of Australia’s decision to raise the cash rate came as no surprise. However, the split vote and the removal of hawkish language from the accompanying statement caught markets off guard, triggering a sharp decline in the AUD/USD pair. Let’s examine the factors behind this reaction and develop a trading strategy.
The article covers the following subjects:
Major Takeaways
- The RBA raised its benchmark rate to 4.85%.
- The market is skeptical that the rate-hiking cycle will continue.
- The decline in iron ore prices is weighing on the aussie.
- Short positions can be considered on a breakout of 0.696.
Weekly Fundamental Forecast for Australian Dollar
Buy the rumor, sell the news. Despite the Reserve Bank of Australia’s (RBA) efforts to convince investors that its monetary tightening cycle was not over, following its fifth cash rate hike since the beginning of the year, bringing the rate to 4.85%, markets remained unconvinced. Expectations of another rate hike in December have fallen to zero, while the probability of a further increase by May 2027 has dropped from 50% to 30%. In response, the AUD/USD pair plunged to a two-week low.
Investors anticipated a rate hike as most Bloomberg-surveyed economists had forecast, while derivatives markets had priced in an 80% probability of a November hike. However, investors are increasingly concerned that the RBA’s reluctance to exercise the same degree of caution as the Fed, the ECB, or the Bank of Japan could push the Australian economy into recession.
Australian Inflation and Unemployment Rate
Source: Bloomberg.
However, the RBA takes a different view. According to Governor Michele Bullock, unemployment remains low, and the economy continues to generate jobs. In her assessment, Australia is nowhere near a recession. At the same time, consumer price inflation surged to 4.3% in September, forcing the central bank to maintain a relatively hawkish stance. Nevertheless, removing the reference to further monetary tightening, if necessary, has cast doubt on the continuation of the rate-hiking cycle and dealt a blow to the AUD/USD pair. Instead, the RBA emphasized that it would do whatever it deemed necessary to bring inflation back within its 1–3% target range.
The shift towards less hawkish rhetoric, combined with the 6–3 split in the rate decision, sent the Aussie tumbling. The sell-off was further exacerbated by simultaneous turmoil in commodity and equity markets, as well as weakness in the Chinese yuan.
The Australian dollar is widely regarded as both a commodity-linked and a high-yield currency. Iron ore is one of Australia’s key export commodities, and October marked the seventh consecutive month of declining prices. Had it not been for a brief recovery in August, the downward trend would have looked like a plunge off a cliff.
AUD/USD and Iron Ore Prices
Source: TradingView.
Under these circumstances, Canberra may actually benefit from a weaker currency, as it would help support Australian exports. China has taken a similar approach. Its announcement of a 6% increase in reserve requirements for financial institutions sent a clear signal of Beijing’s discomfort with the renminbi’s appreciation. The move helped the USD/CNH rebound from a multi-month low. At the same time, other currencies sensitive to developments in China, including the Australian dollar, came under pressure.
Add to this the correction in the Nasdaq 100 and the resulting deterioration in global risk appetite, and it becomes clear that the RBA is not solely responsible for the aussie’s sharp decline.
Weekly Trading Plan for AUD/USD and AUD/NZD
The divergence in monetary policy creates an opportunity to sell the AUD/NZD, provided the pair remains below 1.2450. As for the AUD/USD, its near-term direction will depend on whether bears can push the pair out of the 0.6960–0.7040 range. A decisive break below the lower boundary would provide a potential selling signal.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of AUDUSD in real time mode
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