Australia dollar rallies as rate cut seen last for now

[SYDNEY] The Australian dollar rose sharply across the board in a whippy session on Tuesday after the Reserve Bank of Australia (RBA) cut its cash rate for the second time this year, and appeared to take a neutral tone on the policy outlook.

The Aussie at first dropped three-quarters of a US cent to A$0.7787, before staging a ferocious reversal to A$0.7900, up 0.8 per cent on the day.

Dealers said the Aussie was squeezed higher after stops above US$0.7860 were tripped.

The RBA cut its cash rate by 25 basis points to a record low 2.00 per cent at its monthly policy meeting but revealed no explicit bias to ease further.

The central bank noted improving trends in household demand and stronger employment growth. "The RBA cut, but the tone of the statement is neutral suggesting that further cuts are much less likely," Greg Gibbs, a strategist at Royal Bank of Scotland in Singapore. "The AUD has bounced as the market absorbed the surprisingly upbeat message in this statement that sits at odds with most forecasts from domestic economists." Interbank futures 0#YIB: dipped from July onward as the market pared back the prospects of rates going below 2 per cent.

Australian government bond futures dropped to multi-month lows, with the three-year bond contract prices off 13 ticks to 97.960. The 10-year contract was down 13.5 ticks at 97.1750, the lowest since early January.

Three-year cash yields jumped 10 basis points to 2.15 per cent.

Resistance for the Aussie was found at US$0.7910 and a break would target a three-month high of US$0.8077 touched last week. Such a rise was unlikely to please the RBA which again stated that a lower currency was needed to support the economy.

The euro slumped 1 per cent to A$1.4069, while the Aussie rose sharply against the yen, pound and kiwi.

Aussie strength dragged the New Zealand dollar higher to US$0.7547, from US$0.7531. Support was found at US$0.7480 with resistance at US$0.7600.

New Zealand government bonds were largely flat, but there was a mild offered tone at the long end, where yields rose a tick.

REUTERS