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Australia dollar drops to lowest since 2009 after New Zealand's aggressive rate cut

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Australia's dollar slid to its lowest in a decade on speculation the nation's central bank will follow its New Zealand counterpart in delivering a bigger-than-expected interest-rate cut.

[SINGAPORE] Australia's dollar slid to its lowest in a decade on speculation the nation's central bank will follow its New Zealand counterpart in delivering a bigger-than-expected interest-rate cut.

The Aussie dropped as much as 1.2 per cent to 66.77 US cents, breaching a low set during the January flash crash. The nation's three-year bond yield declined seven basis points to a record 0.631 per cent, compared with the policy rate of 1 per cent.

The Reserve Bank of New Zealand surprised traders on Wednesday with a 50-basis point rate cut as it sought to pre-empt the impact of slowing global growth, fueling bets the RBA will follow suit.

With the move coming after China allowed the yuan to weaken past a key level and US President Donald Trump demanding more easing from the Federal Reserve, traders may start to speculate about a cycle of competitive devaluation.

sentifi.com

Market voices on:

"We're seeing insurance cuts from across the board now and I expect we'll definitely see more to come," said Shaun Roache, chief Asia-Pacific economist at S&P Global Ratings in Singapore. "Clearly the external uncertainty from the trade war is driving considerations of easing by every central bank in the region."

The New Zealand dollar tumbled as much as 2.3 per cent to 63.78 US cents, while the nation's two-year bond yield fell as much as 20 basis points to a record 0.767 per cent. Traders are now pricing in a 70 per cent chance the RBA will cut by 25 basis points at its September meeting.

Still, markets may be getting ahead of themselves in expecting the RBNZ to influence the RBA's next move, according to macro hedge fund Ensemble Capital. Any cooling in trade tensions may see the RBA rely more on economic data to drive their next move, said Singapore-based chief investment officer Damien Loh.

"Markets have a tendency to try and front-run the central bank," he said. "Over the course of the month, I think the Aussie can remain roughly unchanged."

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