Lowest since March: Australian Dollar slides as strong NFP bolsters Fed hike bets

• Multi-month lows for AUD/USD as US Dollar gains and risk aversion pressure the Aussie.
• Above-forecast US Nonfarm Payrolls reinforce expectations for additional Fed tightening.
• Following its fifth rate increase this year, the RBA signals a pause to assess developments.

AUD/USD trades near 0.6858 at the time of writing. Friday’s decline extends its losses to levels last reached in late March, putting the pair on course for a weekly fall of more than 2%. Pressure comes from a stronger US Dollar, reduced risk appetite during the AI-led equity sell-off, and cautious guidance from the Reserve Bank of Australia (RBA) after this week’s rate increase.

The US Dollar Index (DXY) stands near 102.15, recovering from a five-week low of around 101.24 earlier this week. The index measures the currency against six major peers. Strong US employment figures released on Friday support the Greenback’s recovery from the pressure that followed the US midterm election results.

October US Nonfarm Payrolls (NFP) increased by 165K, well above the 65K forecast. An upward revision lifted September’s gain from 29K to 60K. Meanwhile, the Unemployment Rate declined unexpectedly from 4.2% to 4.1%.

Traders assign an 80% probability to a December rate increase, according to the CME FedWatch tool. A resilient labour market offers Federal Reserve (Fed) hawks little incentive to retreat from further tightening: inflation remains above the Fed’s 2% target, while energy costs present additional upside risks.

Australia’s cash rate reached 4.85% on Tuesday after the RBA delivered an expected 25 basis points (bps) increase. Borrowing costs are now at their highest since 2008. This was the central bank’s fifth hike this year as policymakers confront inflation driven by higher oil prices.

An explicit reference to additional hikes if required was removed from the central bank’s guidance. In Governor Michele Bullock’s words, it was “probably best to pause and assess incoming data.”

RBA’s dovish hike: OCBC sees a cut as the likely next move

OCBC Group Research analysts point to a shift in the RBA’s assessment despite its latest rate increase. They acknowledge the Bank’s justification that “inflation remains elevated and recent data indicate that it is broadly based.” At the same time, they emphasise its acknowledgement that “the increases in the cash rate target since the beginning of the year have tightened financial conditions,” with effects already apparent as “the economy is slowing, housing prices have fallen significantly and the unemployment rate has risen.” On that basis, OCBC’s conclusion is that “we expect no more hike in this cycle, and the next policy move is likely to be a cut.”