WELLINGTON/SYDNEY: The Australian dollar skidded to two-month lows on Tuesday after the Reserve Bank of Australia (RBA) cut interest rates to record lows and left the door open to yet more easing, sending bonds rallying sharply.
The Aussie dropped over half a cent to as deep as $1.0178, its lowest since early March, piercing a triple bottom around $1.0220. It last fetched $1.0192, showing a loss of 0.7 percent on the day.
Interbank futures rallied hard as the market had only priced in an evens chance of a cut to a record low of 2.75 percent this week. A further move to 2.5 percent is almost fully implied by August.
"Rate cuts rarely happen by themselves for the Reserve Bank, and we would expect to see a follow up cut, with the timing probably going to be June after the first quarter capex numbers," said Brian Redican, a senior economist at Macquarie.
The key business investment report for the first quarter is due on May 30, while the RBA next meets on June 4.
The drop in cash rates dragged down the entire yield curve, with three-year cash yields dropping nine basis points to 2.50 percent, the lowest since last October.
Yields on 10-year bonds fell six basis points to 3.08 percent. Three-year bond futures jumped 0.080 points to 97.520 and the 10-year contract added 0.050 points to 96.930.
The RBA pointed to an historically high Australian dollar as one reason for the cut in rates. The Aussie has been kept high in part because other major central banks are taking ever more aggressive easing steps, putting pressure on their currencies.
The European Central Bank cut its rates just last week, while the Bank of Japan has embarked on a truly radical monetary expansion that sent the yen crashing.
The Aussie gave back some of those gains on Tuesday, slipping 0.8 percent on the yen to 101.00. The euro rose 0.6 percent to A$1.2833, with gains limited by hints from the ECB that it could yet ease further.
It also lost altitude against its New Zealand cousin, particularly as markets believe the next move in rates there will be upward, albeit not until next year.
The Aussie dipped 0.3 percent to NZ$1.1990, touching its lowest since October 2009.
The New Zealand dollar was a shade softer at $0.8500. Near term support for the kiwi was seen at the overnight low of $0.08486 and below that $0.8450, with $0.8550 the near term resistance.
"It remains the wave of offshore liquidity that supports the New Zealand dollar overall, and this is not expected to diminish anytime soon," said Derek Rankin or Rankin Treasury Advisory.
Kiwi was modestly sold off against the euro, yen and sterling, resulting in a slight dip in the trade weighted index .
The currency was unmoved by local data showing wage growth slowed a shade in the first quarter, while an associated employment survey suggested some modest job growth.
"There is little in today's data to challenge the RBNZ's plan to remain on hold for the foreseeable future," ANZ senior economist Mark Smith said.
New Zealand government bond yields also quiet with a hint of a bid tone.
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