Australia dollar skids on dovish central bank, rate cut wagers

SYDNEY: The Australian dollar slid on Tuesday after the head of the country's central bank said he would not be surprised if the currency declined further, while leaving the door open for another cut in interest rates to support the domestic economy.

The Aussie sank to $0.9083, from $0.9205 in early trade, having already been under pressure after failing to break formidable resistance around 93 cents.

Comments from Reserve Bank of Australia (RBA) Governor Glenn Stevens, who said that inflation allowed some scope for further easing, were taken by investors as affirming expectations for a cut at its policy meeting next week.

Swap rates now imply no less than a 90 percent chance that rates will be cut a quarter point to a record low of 2.75 percent when the central bank meets on Aug. 6. That was up from 75 percent early in the session. The market is also pricing in the prospect of rates reaching 2.25 percent in coming months.

The case for an easing was reinforced by data showing a surprise 6.9 percent drop in approvals to build new homes in June. The RBA has been counting on a revival in home building to help support the economy as mining investment cools.

Stevens added to the pressure by saying the decline in the local dollar in recent months made economic sense and it could fall further. The Aussie is now down around 14 percent against its US counterpart since early April.

"That was a green light to sell the Aussie," said Annette Beacher, head of Asia-Pacific Research at TD Securities. "We have changed our view and now look for a rate cut next week."

Australian government bond futures firmed on the outlook for short rates, narrowing the spread over US Treasury yields.

The three-year bond contract erased early losses to rise 5 ticks to 97.400, and briefly touched a five-week high. The 10-year contract gained 3 ticks to 96.285.

The Aussie also took a spill against the New Zealand dollar, falling 0.8 percent to NZ$1.1362 and near lows last seen in late 2008.

For its part, the kiwi currency was resilient on the US dollar at $0.7994, underpinned by market expectations that domestic interest rates will likely rise over the coming year.