Australian Dollar Under Pressure as RBA Signals Pause and Risk Assets Recede

The Australian dollar has faced a challenging stretch. “End-of-cycle” speculation following the Reserve Bank of Australia’s dovish November rate hike, an 18% drop in crude oil last week, and renewed doubts about the AI and data-centre investment thesis after Democrats swept the US midterm elections all weighed on the currency. AUD/USD finally broke down late last week, slipping below its October trading range and moving deep into the 0.68s—a key support zone that had held since January.

The Australian dollar opened this week near the 0.69 level, stabilising after last week’s sharp risk-off move. US CPI and PPI data are the major tests ahead. Softer inflation could provide the Aussie some relief, though equities will likely need to stabilise as well. A hotter-than-expected print would keep Federal Reserve tightening risks in play and add further downward pressure. Domestically, the Westpac and NAB surveys will indicate whether five rate hikes are finally beginning to constrain activity.

RBA delivers a dovish hike

The Reserve Bank of Australia delivered the widely expected 25 basis-point increase, taking the cash rate to its highest level since 2008. The Bank also raised its inflation forecasts, cautioning that underlying price pressures will remain sticky, while trimming its GDP projection by 0.3 percentage points. However, the unexpected 6–3 vote split signalled a more dovish tone, with three members assigning greater weight to downside risks for growth and employment. Markets interpreted this as evidence that the RBA could be nearing the end of its tightening cycle. With other central banks still playing catch-up, the shift weighed on the Australian dollar against its G10 peers early in the week.

Notable changes in the Statement on Monetary Policy include the RBA raising its NAIRU estimate—the non-accelerating inflation rate of unemployment—to 4.75% from 4.6%. The Bank now also expects core inflation to ease to 2.9% by the end of 2027, later than previously forecast. The latest statement dropped the phrase that the RBA is “willing to increase the cash rate further if necessary,” further suggesting the hiking cycle may be complete.

The Australian dollar fell on the day, dropping from the 0.70 handle into the mid-0.69s.

Democrats win control of Congress

The US dollar initially benefited from higher yields, strong AI investment, and upbeat growth expectations, but came under pressure mid-week after the US midterm elections. Democrats regained control of Congress, winning both the House and Senate. This effectively renders President Trump a lame duck for the remainder of his term, as a Democratic Congress can block his legislative agenda, although Trump retains veto power, ruling out any sweeping policy shifts.

At the margin, a Democratic-controlled Congress could lower the likelihood of renewed escalation with Iran, modestly reducing the risk premium in oil, inflation expectations, and US Treasury yields. The US Dollar Index initially reflected this, falling nearly 0.6% on the day to a low of 101.09.

AI sells off sharply

Speculation that a Democratic Congress might curb AI and data-centre spending appeared to overshadow other factors, fuelling a sharp sell-off in AI and equity markets late in the week. With AI and tech stocks already under pressure from valuation concerns, the Democrat sweep prompted a sharper unwind, with the NASDAQ shedding more than US$3.5 trillion by Friday.

Unsurprisingly, the Australian dollar’s traditional risk-sensitive qualities came to the fore during the rout, as it sold off sharply against its G10 peers. This was compounded by the earlier dovish RBA decision. AUD/NZD fell almost 2 cents over the week (-1%) to 1.2338, AUD/EUR declined 1.3% to trade near 0.6179, and AUD/JPY dropped 1.3% to trade just above 109.0 on Monday afternoon.

US nonfarm payrolls

Capping an event-heavy week, US October nonfarm payrolls exceeded expectations, rising by 165,000 versus an expected 70,000, while the unemployment rate edged down to 4.1%. Hiring was broad-based, led by healthcare, professional services, and manufacturing, with private-sector job growth the strongest since March.

For markets, the message is clear: employment is unlikely to stand in the way of another rate hike. With inflation remaining the primary concern, markets are pricing in roughly an 80% chance of a December hike. The initial market reaction reflected that view, with two-year Treasury yields rising after the release.

The week ahead

US October CPI and PPI data dominate the economic calendar this week. US inflation remained firm in September, with headline CPI rising 0.6%, though roughly half of the increase came from energy. Core inflation was softer at 0.3%, while underlying inflation excluding food, energy, and shelter eased to the Federal Reserve’s 2% target. For October, inflation pressures are expected to cool as energy and housing costs moderate.

Domestically, attention turns to the November Westpac consumer confidence survey and NAB’s October business survey. Both have been soft in recent months against a backdrop of elevated energy prices and rising interest rates.

Investors should also watch for extensive Fedspeak—no fewer than 15 engagements—and Chinese trade data.

Key Events

Monday

• Fedspeak; Bowman, Goolsbee, Barkin

Tuesday

• Australia November Westpac Consumer Confidence, October NAB Business Survey
• China October Trade Balance
• US October CPI, NFIB Small Business Optimism
• Fedspeak; Logan, Schmid, Bowman, Paulson

Wednesday

• US bond markets closed; Veterans Day Holiday

Thursday

• Japan October PPI
• Fedspeak; Schmid, Daly, Goolsbee, Hammack, Williams, Barr

Friday

• US October PPI
• Fedspeak; Daly, Jefferson

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