The Australian and New Zealand dollars sank on Tuesday after the Australia's central bank cut interest rates to record lows, surprising some who had thought it might wait until March before easing. The Australian dollar skidded to $0.7660, having gone as far as $0.7650, its weakest since 2009. The 1.9 percent drop was the biggest one-day loss since mid-2013. Support was found at the psychological level of 75 cents. The Aussie suffered the most against the safe-haven yen with a 2.2 percent dive, while the euro and pound both powered higher.
The Reserve Bank of Australia (RBA) cut its cash rate a quarter point to 2.25 percent, breaking an 18-month hiatus on stimulus as it seeks to spur a sluggish economy and keep downward pressure on the local dollar. Markets had been leaning toward a cut this week, though only 9 of 30 analysts in a Reuters poll had tipped an easing.
Interbank futures jumped, while pricing in a near 50-50 probability of a further move to 2.00 percent at the next policy meeting in March. "The risk is that it heads lower than that," said Su-Lin Ong, a senior economist at RBC Capital Markets, seeing rates bottoming at 2 percent. Yields on 10-year government debt had already been trading below the cash rate and dropped further to a record low of 2.32 percent, while Australian stocks hit their highest since 2008.
Government bond futures exploded to historical peaks with the three-year bond contract up 15 ticks at 98.210. The 10-year contract also jumped 15 ticks to 97.7400. The premium between Australian and US 2-year bond yields shrunk to 141 basis points, the smallest since 2007. The RBA move sent the New Zealand dollar reeling as far as $0.7194, its weakest in four years. It was down 1.1 percent on the day at $0.7200. Tim Kelleher, head of institutional FX sales at ASB Bank in Auckland, said the Kiwi will find strong support as it falls towards 71 US cents. New Zealand government bonds had slipped earlier, nudging yields 1.5 basis points higher along the curve.