Australia dollar slides to 10-year low after New Zealand's aggressive rate cut

The Reserve Bank of New Zealand surprised traders on 7 Aug, 2019    with a 50-basis point rate cut as it sought to pre-empt the impact of slowing global growth, fueling bets the RBA will follow suit.
The Reserve Bank of New Zealand surprised traders on 7 Aug, 2019 with a 50-basis point rate cut as it sought to pre-empt the impact of slowing global growth, fueling bets the RBA will follow suit.PHOTO: BLOOMBERG

SINGAPORE (BLOOMBERG) - Australia’s dollar slid to its lowest in a decade on Wednesday (Aug 7) 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 per cent to 66.77 US cents, breaching the low of 67.41 cents set during the January flash crash. The nation’s three-year bond yield tumbled seven basis points to a record 0.631 per cent, widening its gap with the central bank’s policy rate of 1 per cent.

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 preempt 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 per cent to 63.78 US cents, while the nation’s two-year bond yield fell as much as 20 basis points to a record 0.765 per cent. Traders are now pricing in a 70 per cent chance Australia’s central bank will cut by 25 basis points at its September meeting.

Australian policy makers are determined to revitalize price growth, 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.

 

CHINA RETALIATION

US-China trade tensions have ratcheted up over the past week with President Trump saying he may slap 10 per cent tariffs on another US$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.

Given the worsening outlook for global growth, “we think that the RBNZ and RBA have appetite and propensity for more easing,” said Vishnu Varathan, head of economics and research at Mizuho Bank Ltd in Singapore.

Still, 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.”