AUD’s Sensitivity to U.S. Policy and Global Trade Tensions

The Australian Dollar (AUD) is currently under pressure as investor sentiment cools toward riskier assets, a shift largely tied to developments in U.S. politics and domestic economic indicators. Recently, reports about U.S. President-elect Donald Trump’s cabinet selections, specifically for roles like the U.S. Trade Representative, Secretary of State, and National Security Advisor, have amplified market concerns. These officials, known for their protectionist stances and scepticism toward China, have added a cautious undertone in markets, causing a shift away from the previous "risk-on" rally that had been bolstering AUD/USD.

AUDUSD H4

 Source: FInlogix ChartsDespite these headwinds, Australian interest rates have provided a degree of support for the AUD. The Reserve Bank of Australia (RBA) has indicated a more conservative stance on rate cuts, suggesting none are expected until the New Year. Currently, market pricing reflects a modest expectation of future rate cuts by the RBA, anticipating under 40 basis points in reductions within the next year. However, recent wage data from Australia fell short of expectations, eroding some support for the AUD. Annual wage growth slowed more than expected, a likely result of a lower minimum wage increase in 2024 compared to the previous year. Quarterly wage growth remained stable, although year-on-year growth dipped to 3.5%—a gradual decline from last year’s 4.1% rate.

Rate Expectation RBA 

 Source: Prime Market TerminalAustralia’s tight labour market has maintained wage growth at elevated levels, even as productivity growth remains low. Retail sales data suggest that Australian households are being cautious with their disposable income, preferring to save rather than spend the benefits from recent tax cuts and utility rebates. Combined with softer wage growth, this data indicates that the RBA may lean toward further rate cuts in the future. Yet, the slight decrease in wage growth aligns with the RBA’s projections of a 3.4% annual wage growth for the second half of 2024, which should not significantly alter its rate policy.

Looking forward, while overall economic growth has slowed, employment figures have been surprisingly resilient, with job advertisements remaining robust and the unemployment rate hovering near the estimated natural level of 4%. Should employment growth continue to outpace expectations, it could complicate the RBA’s balancing act as it evaluates the timing and necessity of rate cuts.

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