Australia dollar slips to seven-week low on RBA cut, commodities fall

[SYDNEY] The Australian dollar dropped to a seven-week low on Wednesday after the central bank's first rate cut in a year and sliding commodity prices further trimmed long positions in the currency.

The New Zealand dollar also skidded on broad US dollar strength and falling dairy prices.

The Australian currency stood at US$0.7489, having sunk as deep as US$0.7467, its lowest since mid-March and down two cents in 24 hours.

Key support was found at US$0.7455, the 38.2 per cent retracement of the January-April rise and a break would target US$0.7335.

The market has recently held very long positions on the Aussie dollar as a yield play and was caught off-guard by the Reserve Bank of Australia's rate cut to a record low of 1.75 per cent.

"The RBA's concerns about entrenched low inflation and deflation risks mean that another rate cut is likely," said Michael Workman, a senior economist at Commonwealth Bank of Australia, seeing an easing to 1.50 per cent in August.

Debt markets imply around a 50-50 chance of a move by August.

Also undermining the Aussie were sliding commodity prices with iron ore, Australia's top export earner, slipping 4 per cent on Tuesday.

The Aussie dollar hovered near multi-week lows across the board. Against its New Zealand counterpart it managed to bounce 1.5-cent to NZ$1.0873, from a trough of NZ$1.0746.

The New Zealand dollar was trading at US$0.6925, up from Wednesday's opening price of US$0.6915, but far from Tuesday's high of US$0.7054.

It had been sucked lower overnight by the RBA's easing and a fall in global dairy prices, though strong domestic employment data provided some support.

Data showed a solid rise in employment in the first quarter and while the jobless rate edged up, this was due to a sharp expansion in the labour force. "The lift in the quarter was entirely the result of strong participation, which is an encouraging sign,"said ANZ analysts in a research note.

New Zealand government bonds gained, sending yields 6.5 basis points lower at the long end of the curve.

Australian government bond futures extended their rally, with the three-year bond contract 2 ticks higher at 98.280 and near a two-month peak.

The 10-year contract rose 4.5 ticks to 97.5800, while the 20-year contract added 4 ticks to 96.9650.

The premium between two-year Australian and US government debt dropped below 1 per cent for the first time since early March.

REUTERS