Australian dollar bears eye weak jobs data as key to Sept rate cut

Sydney

SIGNS that the global trade war is morphing in a currency race to the bottom means the battered Australian dollar is looking more vulnerable than ever.

Poor jobs data last week may tip the balance in favour of another rate cut by the Reserve Bank of Australia (RBA), providing a catalyst for the Aussie to extend its recent 10-year low and test the psychologically important level of 0.65 US cents.

Downward momentum is already firmly in place, with the currency slumping from its July high after the US-China war spilled over into foreign exchange markets.

New Zealand's central bank set the scene for more rate cuts globally when it slashed borrowing costs 50 basis points recently - sending the Australian dollar past its January flash-crash nadir to the lowest level since 2009.

While the RBA passed up an opportunity to lower rates at its August meeting, it left the door open for further monetary easing "if needed". Aussie-dollar bears will be betting it is "needed" if labour market data on Thursday show continued slackness, which undermines the central bank's efforts to nudge up inflation.

Money markets are 50 per cent priced for a 25 basis-point cut by the RBA in September, and have fully priced one in by the end of October.

Reserve Bank governor Philip Lowe said on Friday that he's still prepared to reduce Australia's record-low interest rates further if necessary, while also signalling the economy could be through the worst of its slowdown.

Economists surveyed by Bloom-berg forecast an unemployment rate of 5.2 per cent in July - far from the RBA's estimate of full employment at 4.5 per cent. Worryingly for policy makers, the jobless rate has been moving the wrong way for most of this year.

A test of 65 US cents against the Australian dollar may occur sooner rather than later if leveraged funds decide it's time to aggressively short the currency after the employment data.

Don't be surprised if the most bearish of pundits start whispering about 50 basis points next month as the race to the bottom gathers pace. BLOOMBERG