Australian, New Zealand dollars trampled in race to the bottom

[SYDNEY] The New Zealand dollar fell on Monday after an emergency rate cut by the country's central bank, while its Australian counterpart slipped on market talk of a possible surprise policy review to combat the fallout from the coronavirus pandemic.

The kiwi dollar fell as low as us$0.5929, the deepest since May 2009, after the Reserve Bank of New Zealand (RBNZ) slashed its benchmark interest rate by 75 basis points to a record low of 0.25 per cent and signalled large scale asset purchases of government bonds as its next step.

The unscheduled decision follows rate cuts by central banks around the world, including the Federal Reserve, which cut interest rates to near zero on Sunday in a shock move.

Sharp losses in the greenback helped the kiwi stabilise a bit at US$0.6056.

"Global markets have dislocated further with increasing signs of stress in some markets, sharply reduced liquidity, and price action hinting at forced selling," RBC economist Su-lin Ong said in a note.

"Beyond just a tightening of financial conditions, the risk is these moves worsen a real economy already struggling with the onset of Covid-19," she added.

"Against this backdrop, we think the risk is increasing of an unscheduled final 25bp cut from the Reserve Bank of Australia (RBA) ahead of its 7 April meeting, which is still 3 weeks away."

The Australian dollar was last down 0.2 per cent at US$0.6175 after earlier plunging to US$0.6110, a level not seen since late 2008.

The RBA cut its key rate this month to 0.5 per cent to help the economy cope with the rising economic toll from the coronavirus that has hit travel, tourism, consumer and business confidence and factory activity worldwide.

On Monday, the RBA pumped extra liquidity into the banking system, part of a package of measures aimed at ensuring business and households have access to credit as the coronavirus causes chaos in global financial markets.

"It's a race to the bottom and the RBA will need to follow suit," Citi economist Josh Williamson said.

"We now expect the RBA to announce a 25 basis point rate cut ahead of the April meeting and to follow this up with an announcement on quantitative easing."

Australian government bond futures surged, with the three-year bond contract rising 8.5 ticks to 99.55. The 10-year contract was up 7 ticks at 99.10.

REUTERS