FX Market Update: Aussie Slumps Ahead of Key CPI Data

Australian dollar hits two-month low

The Australian dollar tumbled to its lowest level since August as commodity prices retreated amid jitters on the Chinese economy. Iron ore, one of Australia’s most important exports dropped to $104 from this month’s high of $108. Coal prices have also continued their downtrend in the past few days.

The Aussie is often seen as a proxy for the commodities market because of the vast volume it exports each month. Most of these exports move to China, a country that has showed signs of slowing down.

The AUD/USD pair will be in the spotlight this week as the Australia Bureau of Statistics (ABS) publishes the third quarter inflation data. Analysts expect the data to show that inflation dropped to its lowest level in over two years.

Still, analysts believe that the RBA will maintain a fairly hawkish tone and point to cuts in the first quarter of 2025.

US dollar rallies ahead of key events

The US dollar index rallied to its highest level since August 2nd ahead of key events and data from the US. First, the US is having an election next week, that will have major impacts. Recent polling data shows that the election is still too close to call, with Donald Trump and Kamala Harris being in a tie in most states.

Donald Trump has said that he will be supportive of a weaker dollar. However, some of his policies could push the US dollar substantially higher. For example, his main economic policy is based on more tax cuts and tariffs. Tariffs, especially on China’s imports, will lead to higher inflation, and the potential for higher interest rates.

The US dollar will also react to the upcoming US jobs numbers and personal consumption expenditure (PCE) data. The labor market numbers will be the most important because they will provide more information on what to expect from the Federal Reserve. Analysts expect the Fed to cut rates more gradually going forward.

Japanese yen waits for the BoJ decision

The USD/JPY exchange rate has soared to its highest level since July 31. It has jumped by almost 105 from its lowest level in September, meaning that it is nearing the bull market.

The pair will be in the spotlight this week as the Bank of Japan (BoJ) delivers its interest rate decision. This meeting will come at a time when the country’s inflation has remained above the 2% target in the past few months.

Nonetheless, analysts expect the bank will leave interest rates unchanged for the second consecutive time. A surprise hike will likely lead to a stronger Japanese yen because it will reduce the spread between US and Japanese yields. In a note, analysts at ING Bank said:

We believe that the inflation outlook for the whole of 2024 could be revised upwards, but no major changes are expected for the coming year, while the GDP outlook for FY24 should be revised downwards, reflecting recent production declines related to the auto sector and natural disasters.

ING Bank

Euro continues its downtrend

The euro continued its strong downward trend, falling to its lowest level since August 1 as the divergence between the Federal Reserve and the European Central Bank (ECB) accelerated.

The ECB has now delivered three interest rate cuts since the bloc’s inflation has dropped below the 2% level.

There are concerns that the bloc’s economy is slowing down substantially. For example, the flash manufacturing PMI data has remained below 50 in the past few months. Similarly, industrial production has continued falling.

The key European economic data to watch will be the preliminary third-quarter GDP report and the flash inflation data for October.

British pound waits for UK budget

The GBP/USD pair has slipped from 1.3431 in September to 1.2950, its lowest level since August 19. This sell-off accelerated because of the strength of the US dollar, geopolitical tensions, and the US election.

The pair will be in the spotlight this week as Rachel Reeves delivers the first Labour Party budget in over a decade. In it, she is expected to change the way the US measures debt, a move that will let her borrow more money.

In a statement, to Reuters, she said:

We need to invest more to grow our economy and seize the huge opportunities there are in digital, in tech, in life sciences, in clean energy. But we will only be able to do that if we change the way that we measure debt.

Rachel Reeves

She will also boost more investments in infrastructure and social services. Also, she is expected to boost some taxes.

Historically, the GBP/USD pair tends to react to the October budget. For example, it dropped sharply after Liz Truss announced her mini-budget.

USD/CAD surge accelerates

The USD/CAD exchange rate soared to its highest level in months after the BoJ delivered another jumbo rate cut of 0.50%, bringing the official cash rate to 3.75%. In a statement, the bank said that it had achieved its inflation target. As such, the rate cuts are expected to continue boosting the economy.

The USD/CAD has also surged because of the falling crude oil prices. Brent, the global benchmark, has dropped to $75, while the West Texas Intermediate moved to $73. The Canadian dollar tends to be affected by oil prices because Canada is the fourth-biggest exporter.