The Australian dollar is behaving more as an indicator of global risk sentiment and markets connected to China rather than reflecting interest rate dynamics. Analysis indicates that AUD/USD is closely aligned with copper and the yuan, while largely disregarding rate differentials. This highlights that macro sentiment and trade optimism are the primary factors influencing the market narrative. Although Australia’s Q3 inflation report and the Fed decision could induce short-term fluctuations, their impact appears to be secondary to overarching risk trends. Michele Bullock’s remarks have moderated anticipations for immediate RBA measures, raising the threshold for a November reduction and emphasizing that policy choices depend on forthcoming data. AUD/USD has surpassed significant resistance levels, indicating a shift in sentiment towards purchasing on dips and anticipating bullish breakouts. Momentum indicators are showing signs of support, indicating that the directional trend may be shifting in favor of the bulls. The Australian dollar has returned to its conventional function as an indicator of risk appetite, exhibiting significant connections to China, as evidenced by the robust correlation coefficients illustrated in the chart below.
In comparison to USD/CNH (red line) and COMEX copper futures (yellow line), AUD/USD has recorded values of -0.87 and 0.89 respectively, reaching levels not observed in several months. The Australian dollar has demonstrated a fairly robust inverse correlation with VIX futures (green line). The correlation with rate differentials between Australia and the United States has been notably weaker, particularly at the longer end of the curve. This indicates that although there could be a sudden, singular price adjustment following Australia’s Q3 inflation report on Wednesday, its impact may be temporary and limited to the short term. The Australian dollar’s previously robust correlation with anticipated Fed rate cuts extending to September 2026 (grey line) has now turned decidedly negative, as AUD/USD appreciates in response to the decrease in expected easing. Despite being contrary to typical expectations, it suggests that the optimism surrounding trade negotiations—an element that has certainly played a role in the adjustment of Fed pricing—has recently supported the cyclically oriented AUD. In summary, the correlation analysis indicates that although Australia’s inflation report and the Fed interest rate decision could create short-term volatility this week, the performance of Chinese-linked markets and the overall risk appetite are expected to exert a more significant impact on the Australian dollar’s performance in the long run.
In anticipation of Australia’s inflation report, RBA Governor Michele Bullock countered market expectations that had previously assigned over an 80% probability to a 25bp rate hike in November earlier this month. During her address in Sydney on Monday, she indicated that the board would probably require more data prior to making any further policy decisions. Bullock emphasized that the policy continues to be “a little bit restrictive” and noted that a stronger inflation print this week would be “material” for the Board’s decision. She subsequently specified that a 0.9% increase in core inflation for the September quarter would represent a “material miss” compared to the RBA’s 0.6% projection, whereas 0.8% would render it a close decision. She minimized the increase in unemployment to 4.5% in September, indicating it was close to the bank’s projection and could potentially decrease next month, noting there’s no indication the labor market is “about to fall off a cliff.” According to economist forecasts for the key quarterly trimmed mean inflation rate, the median expectation is a 0.8% print, with several analysts anticipating 0.9% or more. Consequently, her statements have elevated expectations for a near-term rate cut, suggesting that she and the board may prefer to await another labour force survey before determining their next steps.
This movement coincided with trade optimism and prior strength in the Chinese yuan, contributing to an increase in AUD/USD. AUD/USD has successfully surpassed a resistance area that includes the 50-day moving average, the downtrend from the pandemic peaks in early 2021, and horizontal resistance at .6550, creating a possible foundation for initiating new long positions in this vicinity. Traders may consider purchasing before reaching the 50-day moving average, implementing a stop-loss for protection. The initial target is the .6580 resistance level, followed by potential targets at .6625, .6666, and .6700. In the event of a reversal through the previous resistance zone, we would identify support levels at .6521 and, further below, .6480 as potential targets for bearish activity. As the 50 and 200-day moving averages begin to trend upwards, the strategy is shifting towards capitalizing on buying opportunities during dips and pursuing bullish breakouts, rather than attempting to engage with the pair from a short position. Momentum indicators are delivering a supportive signal over a shorter time frame, as RSI (14) continues to rise and move further from 50, suggesting that momentum is beginning to tilt towards the bulls. Despite MACD being in negative territory, it has crossed the signal line from below and is trending towards neutral territory, suggesting that the directional risks may be shifting.