A battered Australian dollar came back from the brink on Friday as central bank intervention and a late bounce in Asian stocks helped calm an offshore rout that had seen it down over 4 percent at one stage. In late trade, the Aussie dollar had clawed its way to $0.6191 and away from a one-month low of $0.6075.
It had tumbled three US cents in New York on Thursday as the S&P 500 shed more than 6 percent for the second day running. The deepening gloom over the world economy and much talk of global deflation led investors to price in the prospect of ever-more aggressive rate cuts from the Reserve Bank of Australia (RBA), sending bond yields to record lows.
" Accordingly, I expect the RBA will cut by 100 basis points in December," he added. "That will reverse six years of monetary tightening in just four meetings over three months"
The central bank has already cut by a massive 200 basis point to 5.25 percent, but interbank futures were implying a rate of just 4.08 percent by Christmas. The sense of urgency was fuelled by the Swiss National Bank, which stunned markets on Thursday by cutting its rates 100 basis points in a completely unexpected move.
Stocks of commercial banks had also taken a beating on Thursday with Citi slumping over 26 percent, sparking talk it might have to find a merger partner. The early fall in the Aussie dollar was so severe, and the market so disorderly, that the RBA stepped in to buy the currency around $0.6080, saying it was providing necessary liquidity.
With reserves of just $44 billion, the RBA can only buy time in a forex market that trades over $3 trillion a day. It spent a record A$3.15 billion in October alone.
Yet, Friday's action was enough to prevent a break of major support around 60 US cents and allow a late turnaround in Asian equities to force a round of short-covering. It also helped the Aussie recover to 58.56 yen, from lows around 57.00, though that was still down from 60.37 late here on Thursday and 63.00 this time last week.