SYDNEY/WELLINGTON: The Australian dollar took a spill on Tuesday after the Reserve Bank of Australia (RBA) surprised some by cutting its cash rate to a record low, dragging the New Zealand dollar lower in turn.
The Australian dollar skidded 1.4 percent to $0.7561 on the day. A break of $0.7548 would target the April low of $0.7490.
The Aussie dropped to its lowest in two months against the yen, euro and pound , while it touched a six-month trough versus its Canadian peer.
The RBA cut its cash rate by a quarter-point to a record low of 1.75 percent at its monthly policy meeting, the first easing in a year as it seeks to insulate the economy from creeping deflation.
The market had been evenly split on whether it would ease in the wake of surprisingly low inflation, while the majority of economists had forecast rates on hold.
"The main trigger here was the inflation numbers last week," said Shane Oliver, chief economist at AMP Capital Investors.
"(The RBA) does also refer to complications from the appreciation in the Australian dollar," he said, seeing another rate cut in August. The Aussie is still up around 4 percent so far this year.
Interbank futures <0#YIB:> rallied sharply, implying around a 60 percent chance of another easing by August.
Markets were awaiting Australia's annual budget, though its impact is typically limited because Australia is AAA-rated and has relatively low debt.
The New Zealand dollar fell 0.6 percent to $0.6980, away from 10-month highs as the RBA move reinforced expectations of an easing by the Reserve Bank of New Zealand (RBNZ) in June.
Overnight index swaps imply a 67 percent chance of an interest rate cut to 2 percent on June 9.
Supporting the case for a move was a rise in the kiwi against the Aussie dollar as Australia is New Zealand's second largest trade partner after China.
The next focus is on the results of a global dairy auction and labour data both out on Wednesday.
New Zealand government bonds eased, sending yields 1 basis points higher at the long end of the curve.
Australian government bond futures rallied sharply with the three-year bond contract up 12 ticks at 98.260, the highest since early March.
The 10-year contract added 6.5 ticks to 97.5500 in a bullish steepening of the curve. The 20-year contract shed 2 ticks to 96.8500.
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