The Australian dollar extended losses to fall to two-month lows on Monday, as mounting worries of a deep global slowdown and expectations of a big interest rate cut at home sidelined investors. Appetite for riskier assets was hit by data showing the United States economy contracted at the fastest pace in nearly 27 years in the fourth quarter.
Asian stocks were lower and so were commodities, of which Australia is a big exporter. With almost all of Australia's export markets contracting in the fourth quarter, weak domestic data on Monday reinforced expectations that the Reserve Bank of Australia (RBA) may opt for a bold 100 basis points rate cut when its monetary board meets on Tuesday.
"Not only has a 100 basis point cut on Tuesday been fully priced, but the expectation of how much the RBA will cut interest rates over the next 12 months has blown out," said John Kyriakopoulos, currency strategist at National Australia Bank.
"If this trend to pricing a lower trough in the cash rate continues after the RBA rate decision Tuesday, then the Aussie could be in for a tough period." A hefty cut will narrow interest rate differentials that Aussie assets command over their US counterparts.
A Reuters poll found a majority of analysts expected the official cash rate to be cut by 100 basis points to a record low 3.25 percent. The market is pricing in further easing this year toward 2.0 percent. The Aussie was at $0.6310, having slid to as low as $0.6305, its lowest since December 5.
It lost 8 percent during January as extreme risk aversion saw investors dump currencies linked to growth and commodities. The Aussie fell to a near two-week low against the yen, trading at 56.53 yen, not far from a recent low of 56.46 yen hit on January 23. Aussie bill futures stayed near record highs as the market priced in aggressive policy easing in the near term.
Bonds recouped losses on weak domestic economic data and with all eyes on the RBA rate decision and accompanying statement. Bonds ran into profit-taking, tracking US Treasuries, which fell amid mounting fears of increased issuances by the US government. Three-year bond futures rose 0.02 points to 97.110, and 10-year bond futures added 0.005 points to 95.91.