SYDNEY: The Australian dollar was under heavy pressure on Wednesday, and heading for a third straight month of losses, as investors wagered it was almost certain that domestic interest rates would be cut to record lows next week and perhaps beyond.
The Aussie slipped as far as $0.9011 at one stage, from an early $0.9063 and off nearly three cents from a peak of $0.9288 set Monday. It was on course for a 1.3 percent fall in July, bringing losses so far for the year to 13 percent.
Options-related demand helped protect the recent low of $0.8998, but dealers doubted that could last and warned a break would target $0.8850.
The slide followed dovish comments from Reserve Bank of Australia (RBA) Governor Glenn Stevens on Tuesday, which led the market to not only price in a cut in rates next week, but a second easing before year-end.
"We had already been forecasting a 25 basis-point rate cut in August and with the Governor giving the green light for lower interest rates this now looks a sure thing," said Alan Oster, group chief economist at National Australia Bank.
Swap rates now imply a 93 percent chance that rates will fall to 2.50 percent at the RBA's policy meeting on Aug. 6.
"We now also expect an additional cut to 2.25 percent before year end - most likely in November," added Oster. "The RBA will retain a bias to ease well into 2014."
The prospect of rates being lower for longer was reflected in government borrowing costs, where yields on one-year paper dropped to record lows at 2.32 percent.
The yield curve steepened yet further with the gap between three- and 10-year yields out at four-year highs of 119 basis points. Bond futures were little changed on Wednesday, with the three-year contract consolidating recent hefty gains.
The spread over US 10-year Treasury yields also narrowed toward a major barrier at 110 basis points.
With the Aussie's yield premium eroding, it skidded to a three-year trough of 69.6 on a trade-weighted basis and struck a fresh five-year trough against its New Zealand cousin.
With the market pricing in a hike in New Zealand rates by early next year, the Aussie fell as deep as NZ$1.1304 on Wednesday, its lowest since November 2008.
The kiwi lost some ground to the US dollar at $0.7983 , yet was still set to show a gain of 3.1 percent for the month, the largest since September last year.
Near-term support for the kiwi is seen at $0.7925 and then $0.7905 with resistance at $0.8015. New Zealand government bonds were flat along the curve.
The kiwi was supported by dairy giant Fonterra's increasing its forecast payout to farmers thanks to a rise in global prices and a lower currency, providing a healthy boost to national income.
The ANZ Bank's latest business outlook showed confidence at its highest in 14 years, driven by the construction sector.
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