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Australian dollar shackled as market locks in two rate cuts

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The Australian dollar huddled near five-month lows on Wednesday as investors piled into wagers for two cuts in interest rates this year, and even the chance of a third in 2020.

[SYDNEY] The Australian dollar huddled near five-month lows on Wednesday as investors piled into wagers for two cuts in interest rates this year, and even the chance of a third in 2020.

The Aussie was pinned at US$0.6883, just a whisker above its recent rough of US$0.6865 and well off the US$0.6934 top briefly reached at the start of the week.

Markets are almost certain the Reserve Bank of Australia (RBA) will cut its 1.5 per cent cash rate by a quarter point when its policy board meets on June 4, the first easing since mid-2016.

RBA Governor Philip Lowe all but said as much in a speech on Tuesday, prompting all four of Australia's major banks to tip a June move. Futures imply a 93 per cent probability of a cut next month, and are fully priced for 1 per cent by November.

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"The governor has indicated in about the clearest possible language that a rate cut is likely imminent," said Nomura analyst Andrew Ticehurst.

"We look for a total of 50 basis points of easing this year, with a second cut perhaps most likely in August," he added. "The most likely direction for AUD/USD again appears lower, at around 67-68 cents over coming months."

Yields on three-year bonds were already priced for more than one cut at 1.19 per cent, and just above record lows.

Australian government bond futures eased a touch but were still near historic peaks. The three-year bond contract dipped 1 tick to 98.815, while the 10-year contract lost 2.5 ticks to 98.3300.

Adding to the case for stimulus were data showing construction work done fell a real 1.9 per cent in the March quarter, led by home building and engineering.

Citi economist Josh Williams said the disappointing figures reinforced expectations of another poor reading for gross domestic product (GDP), following surprising weakness in the previous six months.

He forecast growth of just 0.4 per cent for the first quarter, which would see the annual pace slow sharply to 1.7 per cent from an already sub par 2.3 per cent.

That sombre outlook overshadowed otherwise bullish news on commodity prices as iron ore topped US$100 a tonne thanks to tight supplies and Chinese demand.

The ore is Australia's largest export earner and the surge in prices is gifting the country with record trade surpluses, while boosting miners' profits and tax receipts.

The New Zealand dollar was stuck at its lowest in nearly seven months at US$0.6500, as markets bet that a cut in rates from the RBA would put pressure on the Reserve Bank of New Zealand to ease again. Earlier this month, the New Zealand central bank cut rates to a fresh record low of 1.5 per cent, the first easing since November 2016. 

REUTERS