Aussie dollar plummets to 10-year low
THE Australian dollar has plummeted to its lowest level since early 2009 after the Reserve Bank of New Zealand shocked the market by slashing its official cash rate by 50 basis points.
Many had expected the cash rate across the Tasman to be lowered by 25 basis points but it was pushed to just 1.0 per cent citing weakened global activity as the trade war between the US and China continues to rage.
"Heightened uncertainty and declining international trade have contributed to lower trading-partner growth," the RBNZ governor Adrian Orr said. "Central banks are easing monetary policy to support their economies."
Australia's central bank held its cash rate on hold at 1.0 per cent on Tuesday, but the aggressive move from New Zealand means the likelihood of a cut next month is heightened.
This stifled investors and sent the Aussie dollar right back to levels not experienced since March 2009 when the Global Financial Crisis kicked into gear, Westpac senior currency strategist Sean Callow said.
At 1.09pm (AEST), the Aussie dollar was worth 67.07 US cents.
A$ slides to fresh lows since Mar 2009, finally taking out 3 Jan ‘flash crash’ low, suffering serious collateral damage from RBNZ’s unexpected -50bp rate cut, seen as raising stakes for RBA #ausbiz pic.twitter.com/wBH5vx7tzW— Sean Callow (@seandcallow) August 7, 2019
"The Aussie (dollar) had been rallying a little bit, up to 67.80, so it was actually looking quite good but no doubt about it was rattled by the aggressiveness of the Reserve Bank of New Zealand's rate cut," Mr Callow told news.com.au.
He said the development across the Tasman means the Reserve Bank of Australia may need to follow a similar trajectory given the RBNZ is alarmed by the same global risks factors Australia is.
"Essentially the market's placing a bit of a bet that the RBA will have to do more on rates than it would have otherwise," Mr Callow said.
"Taking its queue from New Zealand given that they're facing the same concerns over growth headwinds, global economic activity weakening, and heightened uncertainty in international trade tensions.
"All of that is applicable to Australia as well as lower global inflationary pressures."
New Zealand's unemployment level is currently below 4 per cent while the Australia's jobless rate is 5.2 per cent.
This leaves Australia more exposed to the same global risks that have caused the aggressive move in New Zealand, Mr Callow said.
The currency strategist says Westpac is currently predicting the RBA to leave the cash rate on hold again in September, but another cut will send the Aussie dollar spiralling further.
"We've got 66 (US) cents in the first half of next year, but if the RBA goes even earlier than we expected in rate cuts then it will be hard for the Aussie to avoid," he said.
Australian Bureau of Statistics data released on Tuesday shows the national trade surplus is now at a record $8 billion, with exports climbing 1 per cent from May to June, while imports fell 4 per cent.
Higher commodity prices helped lift the export earnings.
These record figures mean the Australian economy and its currency isn't all doom and gloom, Mr Callow said.
"There are offsetting factors that limit the downside for the Aussie," he said.
"There are a lot of fears over what the trade wars mean for Australia but the actual hard reality of it, in terms of Australia's exports, for the past year has been nothing but strength.
"Australia's trade position is very strong right now, so it can handle a bit of damage from overseas."