The primary driver for the risk-off sentiment was a significant drop in US sharemarkets, with the Nasdaq Composite losing 5.4%, the S&P 500 falling 4.0%, and the Dow Jones Industrial Average down 3.3%. Investors cited concerns over the outlook for artificial intelligence and data center regulation following this week’s major Democratic victory in US midterm elections. Technology stocks, particularly those tied to AI, suffered the heaviest losses. The Australian dollar is now testing major support at 0.6895; a break below this level could expose the currency to further declines toward 0.6865.
Domestic policy developments at the Reserve Bank of Australia (RBA) have also unsettled market expectations. The RBA board voted 6-3 to raise the cash rate by 25 basis points to 4.85%. However, board members privately criticized Deputy Governor Andrew Hauser for signaling a likely rate rise before the meeting, arguing his remarks moved markets and risked predetermining the outcome. Assistant Governor Sarah Hunter’s comment that policymakers had “not quite yet” done enough to control inflation further highlighted internal tensions regarding communication strategy.
Analysts are divided on the forward path for the currency. ING strategist Francesco Pesole maintains a bullish outlook, targeting AUD/USD at 0.710 by the end of 2026. Pesole argues that the AUD offers the best short-term carry among G10 currencies, even if the RBA pauses further hikes. “Markets price only a one-in-three chance of another hike,” Pesole noted, adding that the current environment remains challenging due to AI-related jitters but confidence in the 0.710 target remains.
In contrast, Citi has turned bearish on the Australian dollar, citing a downturn in China’s credit impulse and a slowing Australian housing market. Citi noted that the RBA’s “surprisingly dovish” hike, characterized by the 6-3 split and the removal of hawkish guidance, removed a previous headwind to its bearish view. The bank warned that a significant buildup of leveraged AUD longs exists, which could unwind if economic trends continue to weaken, putting further pressure on the currency despite favorable interest-rate returns.
Meanwhile, in Asia, Bank of Japan (BoJ) minutes revealed that policymakers still favor further rate increases in September, with one member arguing for faster tightening if inflation rises. Officials expect inflation to pick up from autumn due to higher food costs and potential energy price increases linked to Middle East tensions. USD/JPY is trading near 157.83, approximately 3.8% below its July 23 peak of 163.99.
For Australian households, the sustained fall in the dollar increases the cost of imported goods, foreign currency subscriptions, and overseas travel. While export-oriented sectors may benefit from improved competitiveness, the immediate impact for many consumers is a reduction in purchasing power. The next major catalyst for markets is the US non-farm payrolls report, due at 12.30am AEDT.
