Australia’s dollar dropped to its lowest in a decade on speculation the central bank will follow its New Zealand counterpart in delivering a bigger-than-expected interest-rate cut.
The Aussie slumped as much as 1.2% to 66.77 US cents, breaching the low of 67.41 cents set during the January flash crash. Australia’s three-year bond yield tumbled seven basis points to a record 0.631%, falling further below the central bank’s policy rate of 1%.
Bets the Reserve Bank of Australia will ease policy jumped after New Zealand cut its benchmark by a deeper-than-expected 50 basis points Wednesday, saying it was trying to pre-empt the impact of slowing global growth.
With markets becoming jittery over the worsening US-China trade dispute and President Donald Trump demanding more easing from the Federal Reserve, traders are starting to speculate about a cycle of competitive rate cuts.
“We’re seeing insurance cuts from across the board now and I expect we’ll definitely see more to come,” said Shaun Roache, chief Asia-Pacific economist at S&P Global Ratings in Singapore. “The external uncertainty from the trade war is driving considerations of easing by every central bank in the region.”
New Zealand’s dollar tumbled as much as 2.3% to 63.78 US cents, while the nation’s two-year bond yield slid as much as 20 basis points to a record 0.765%. Traders are now pricing in a 70% chance Australia’s central bank will cut by 25 basis points in September.
Australian policy makers are determined to revive inflation, RBA Governor Philip Lowe said in a speech last month. He also suggested the government could do more to support the slowing economy and spur the hiring needed to reduce unemployment and revive inflation.
US-China trade tensions have ratcheted up over the past week with President Trump saying he may slap 10% tariffs on another $300 billion of imports from the Asian nation. China retaliated by asking state-owned enterprises to suspend purchases of American agricultural products. The People’s Bank of China’s daily currency fix has become a major focus for currency traders after the yuan weakened beyond the key level of 7 per dollar.
The RBNZ’s decision to make a larger-than-expected 50 basis-point rate cut may have taken into account the possibility of future easing from its peers in the US and Australia, said Masafumi Yamamoto, chief currency strategist at Mizuho Securities Co. in Tokyo.
Australia’s dollar pared some of its earlier losses to be 0.7% weaker on the day at 67.15 cents as of 4:18 p.m. in Sydney.
Markets may be getting ahead of themselves in expecting the RBNZ to influence the RBA’s next move, according to macro hedge fund Ensemble Capital. Any cooling in trade tensions may see the RBA rely more on economic data to drive their next move, said Singapore-based chief investment officer Damien Loh.
“Markets have a tendency to try and front-run the central bank,” he said. “Over the course of the month, I think the Aussie can remain roughly unchanged.”
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