Dollar falls sharply after RBA cut

The local unit was close to half a cent lower in late afternoon, following the RBA’s rate cut.

The Australian dollar has fallen sharply in the wake of the Reserve Bank’s decision to cut the official interest rate to a record low of 1.75 per cent.

At 5.45pm (AEST) on Tuesday, the currency was trading at 76.27 US cents, down from 76.68 cents on Monday.

Commonwealth Bank currency strategist Joseph Capurso said the local currency had rallied half a cent in the hour before the rate decision.

“The bigger they rise, the harder they fall,” Mr Capurso said. “The Australian dollar suffered a 1.7 per cent fall from its high to low today.

“There’s a very good chance the RBA will have to cut again.”

The RBA cut the cash rate by 25 basis points to 1.75 per cent at its May board meeting on Tuesday, after more than 12 months on the sidelines.

The unexpected 0.2 per cent drop in March quarter consumer prices, reported last week, led the RBA to revise its inflation forecast which triggered the rate cut.

Mr Capurso said an August rate cut was likely after the Australian Bureau of Statistics (ABS) publishes its next inflation report.

At 1700 AEST, the Australian dollar was at 80.34 Japanese yen, down from Monday’s close of 81.06 yen, and at 65.65 euro cents, down from 66.43 euro cents.

Meanwhile, the Australian bond market is rallying after the Reserve Bank cut the official interest rate to a fresh record low. RBC senior economist Su-Lin Ong said the rate cut was driven by a reassessment of the inflation outlook following a weak first quarter CPI read.

“The bond market is on fire post the rate cut,” Ms Ong said. “The rate cut really spurred the bond market and while there is not a lot of forward guidance you would have to think a persistent undershoot of the inflation target would see further cuts.

“We’re very much in the camp of further cuts likely.” She said yields had dropped 11 to 16 basis points across the curve.

AAP