AUD at a Crossroads: RBA Easing vs. Risk Aversion

The Australian Dollar just hit its lowest point since late February against the US Dollar, but don’t write it off just yet—the next 48 hours could flip the script entirely.

The Domestic Wild Card: Jobs Report

April’s employment data is the key. Markets are pricing in just 12,000 new jobs (down from 26,100 last month) with unemployment ticking up to 5.8%. Sounds bearish, right? But here’s the thing: Australian economic data has been quietly beating expectations lately, even as forecasts got tougher. Leading indicators are also showing some life. If the jobs report surprises to the upside, it could cool rate-cut fever and give AUD some breathing room.

The RBA Mystery

Last month’s RBA meeting shocked traders with a surprise 25 basis-point cut to 1.75%—the lowest on record. Was it a one-off circuit-breaker or the start of an easing cycle? The May meeting minutes will be crucial. Right now, the market is pricing in at least 25 bps of cuts over the next 12 months, with an 80% probability of 50 bps. Only 20% of traders see a rate cut in June, so expectations are cautious.

The External Headwind: US CPI

Here’s where it gets tricky. US headline inflation is expected to rise to 1.1% YoY while core inflation actually improves to 2.1%. That narrowing gap between headline and core—down to a 3-month low of 1%—could embolden the Fed toward a more hawkish stance. If the Fed stays tough on rates while global growth concerns mount, risk appetite takes a hit. And when risk appetite dies, so does the Aussie.

The Bottom Line

AUD faces competing forces: domestic upside potential from a strong jobs report vs. external headwinds from a stubborn Fed. Sentiment-driven risk assets could stumble if US inflation data reinforces tightening expectations, dragging AUD lower. The real question: which force wins?