RBA Rate Cut Odds Rise, Australian Dollar Under Growing Pressure

Australia's unemployment rate rose to 4.5% in September, marking a four-year high. While 15,000 new jobs were created, 34,000 jobs were lost during the same period.

The Australian dollar and government bond yields both declined as markets began pricing in a higher probability of another interest rate cut from the Reserve Bank of Australia (RBA). The RBA held its key rate steady at 3.6% in October and did not indicate a potential cut at the next meeting. However, the latest labor market data suggests a case for easing is building.

With third-quarter inflation data due next week, it is clearly too early for a final policy call—but the case for a rate cut has clearly strengthened, providing no support for the Australian currency.

The inflation report is scheduled for release on October 29, and market tension is expected to rise as the date approaches. The Melbourne Institute previously projected inflation for October at 3%. However, RBA Deputy Governor Hunter has recently expressed concern that third-quarter inflation may come in hotter than expected. Given the weakness in the labor market, a print on par with Q2 inflation could be sufficient justification for the RBA to cut rates in November, potentially pushing the Aussie further down.

Adding to the uncertainty is the upcoming meeting between President Trump and President Xi, planned for late October. All previous efforts to reach a mutually acceptable agreement have failed—unsurprisingly, given the deep-rooted nature of the trade conflict. While various statements are likely to be made in the lead-up to the meeting, markets may largely shrug them off. For Australia, a stable and steadily growing China is far more critical, as it is the country's largest commodity export destination.

The AUD/USD exchange rate remains near its long-term average but is now, for the first time since July, attempting to break below it.

Last week, it was anticipated that fading U.S.–China trade tensions could help AUD/USD test the 0.6620/30 resistance zone. However, the weak labor market report and rising uncertainty around trade talks are putting increasing downward pressure on the Aussie. The likelihood of a move toward 0.6620/30 has diminished, while the probability of further declines has risen. If the ongoing preliminary talks between U.S. Treasury Secretary Scott Bessent and Chinese Vice Premier He Lifeng begin to show promise, the outlook may shift in favor of a corrective rebound.