Major Takeaways
- The Reserve Bank of Australia lifted its benchmark cash rate to 4.85%.
- Markets are skeptical that the tightening cycle will extend further.
- Declining iron ore prices continue to weigh on the Australian dollar.
- Short positions may be warranted on a decisive break below 0.6960.
Weekly Fundamental Forecast for the Australian Dollar
The classic “buy the rumor, sell the news” dynamic played out following the Reserve Bank of Australia’s (RBA) latest meeting. Despite delivering a fifth rate hike this year—raising the cash rate to 4.85%—the central bank failed to convince investors that further tightening lies ahead. Expectations for a December hike have evaporated, while the probability of an additional increase by May 2027 has fallen from 50% to roughly 30%. Consequently, the AUD/USD pair slumped to a two-week low.
While the hike itself was widely anticipated—Bloomberg-surveyed economists largely predicted it and derivatives priced in an 80% chance—market focus shifted immediately to the risks of overtightening. Investors worry that the RBA’s reluctance to mirror the caution displayed by the Federal Reserve, the ECB, or the Bank of Japan could tip the Australian economy into recession.
Australian Inflation and Unemployment
Source: Bloomberg.
Governor Michele Bullock pushed back against recession fears, noting that unemployment remains low and job creation persists. In her view, the economy is far from a downturn. However, headline inflation accelerated to 4.3% in September, compelling the bank to retain a hawkish bias. The removal of explicit language signaling further tightening “if necessary” cast doubt on the rate-hike trajectory, pressuring the currency. The RBA instead emphasized its commitment to doing “whatever it deems necessary” to return inflation to the 1–3% target band.
The shift toward less hawkish rhetoric, compounded by a 6–3 split vote on the decision, triggered a sell-off in the Aussie. The decline was amplified by simultaneous turbulence in commodity and equity markets, alongside weakness in the Chinese yuan.
The Australian dollar functions as both a commodity-linked and a high-yield currency. Iron ore, a cornerstone export, recorded its seventh consecutive monthly price decline in October. Absent a brief reprieve in August, the downtrend would resemble a sheer drop.
AUD/USD and Iron Ore Prices
Source: TradingView.
In this environment, a weaker currency may actually benefit Canberra by bolstering export competitiveness. China appears to be pursuing a similar strategy; its announcement of a 6% increase in reserve requirements for financial institutions signaled discomfort with renminbi strength. The move helped USD/CNH rebound from multi-month lows, while simultaneously pressuring other China-sensitive currencies, including the Australian dollar.
Coupled with a correction in the Nasdaq 100 and a resulting deterioration in global risk appetite, it is clear the RBA is not solely responsible for the Aussie’s sharp retreat.
Weekly Trading Plan for AUD/USD and AUD/NZD
Monetary policy divergence creates a potential opportunity to sell AUD/NZD, provided the pair holds below 1.2450. Regarding AUD/USD, near-term direction hinges on whether bears can force a breakout from the 0.6960–0.7040 range. A decisive close below the lower boundary would generate a potential sell signal.