The Australian dollar skidded 1 percent on Friday after the central bank slashed its inflation forecasts and markets rushed to price in not one, but two more rate cuts this year. The Australian dollar sank over half a US cent to break under 74 cents for the first time in two months. The loss of major support at $0.7386 would likely see a test of $0.7336, the 50 percent retracement of the January-April move.
It has tumbled more than two cents this week and looked on track for its second largest weekly fall in 2016. Still, the Aussie is 1.5 percent higher so far this year, suggesting there was room to drop further. The Aussie also hit two-month lows against the yen and euro.
The slide came after the Reserve Bank of Australia (RBA) surprised with deeper cuts than anticipated to its inflation outlook. It now sees underlying inflation at just 1 to 2 percent for 2016, from a previous forecast of 2 to 3 percent. "The RBA's statement is extremely dovish," said George Tharenou, an economist at UBS. "We reiterate our view the RBA is likely to cut the cash rate another 25 basis points to a record low of 1.50 percent, probably at its August meeting, but there is now risk of further easing beyond this." Interbank futures rallied sharply, implying around a 75 percent probability of another easing by August and a not immaterial chance of a further move to 1.25 percent.
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