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Aussie Falls to Two-Month Low as RBA Cuts Target Rate to Record

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May 7 (Bloomberg) -- The Australian dollar dropped to its weakest level in two months after the Reserve Bank cut its benchmark interest rate to a record 2.75 percent.

The nation’s currency declined against all 16 major peers as the premium Australia’s two-year bond yield offers over similar-maturity Treasuries fell to its lowest since Oct. 22. The two-year swap rate slid to a record. The RBA will release its monetary policy statement, updating economic forecasts, on May 10.

The “Aussie is unsurprisingly under the hammer,” said Sue Trinh, a senior currency strategist at Royal Bank of Canada in Hong Kong. “The accompanying statement was relatively well balanced from all accounts and offered limited forward guidance, so we look now to Friday’s statement on monetary policy to gauge how far inflation and growth forecasts have been cut.”

The Australian dollar fell as low as $1.0178, the least since March 4, before trading 0.6 percent lower at $1.0198 as of 4:25 p.m. in Sydney. It tumbled 1 percent to 100.88 yen.

New Zealand’s currency declined 0.3 percent to 84.92 U.S. cents and weakened 0.7 percent to 84.02 yen.

Eight of 29 economists surveyed by Bloomberg News predicted the seventh cut in 19 months, while money markets had priced in about a 50-50 chance of a reduction.

RBA Scope

“The board has previously noted that the inflation outlook would afford scope to ease further, should that be necessary to support demand,” central bank Governor Glenn Stevens said in a statement accompanying the decision. “At today’s meeting the Board decided to use some of that scope.”

Policy makers will cut by a further 25 basis points in the third quarter, overnight index swaps show according to Bloomberg calculations. A basis point is 0.01 percentage point. Contracts show 52 percent odds of a cut to 2.5 percent or less in July.

“Rarely is policy cut by one 25 basis point clip without another over the next few months,” Greg Gibbs, a Singapore-based senior currency strategist at Royal Bank of Scotland Group Plc, wrote in a note to clients. “We should expect another cut in July or August unless there is a significant improvement in economic conditions or the Australian dollar falls more significantly.”

An index of house prices in Australia rose 0.1 percent in the first quarter, compared with the median forecast for a 1.8 percent gain, according to figures released by the statistics bureau today. A separate report showed that the nation had a trade surplus of A$307 million ($313 million) in March, the first since December 2011.

Australia’s two-year swap rate, a fixed payment made to receive a floating one, fell to a record low of 2.6675 percent. The nation’s 10-year bond yield dropped five basis points to 3.07 percent.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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