Finance Finance News Australian dollar plunges

Australian dollar plunges

The Australian dollar plunged as low as 77.17 US cents overnight.
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The Australian dollar plunged again overnight, as falling commodity prices dragged it to a fresh five-and-a-half-year low.

The local currency fell as low as 77.17 US cents, as a combination of strong US data boosting the greenback and falling commodity prices hurting resources exporters, before bouncing back to 77.85 by 10:30am (AEDT).

The Aussie dollar has now lost the best part of 3 cents against the greenback over the past couple of days, after having rallied on Wednesday afternoon due to higher-than-expected Australian inflation figures.

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While US dollar strength has played its part, the Commonwealth Bank’s chief currency and rate strategist Richard Grace told ABC News Online that price slides for copper and other metals weighed more.

“All the commodity currencies fell last night – that is the New Zealand dollar, Canadian dollar, Australian dollar – so they fell much more than the European currencies.”

The other major factor behind the Aussie dollar’s rapid decline has been an article from Herald Sun economics columnist Terry McCrann saying that a Reserve Bank rate cut next week is all but certain.

Three of the four major banks now agree that the RBA will lower rates further, although most are not expecting the first cut until at least March.

They have been joined by JP Morgan chief economist Stephen Walters who put out a note this morning forecasting 25 basis point rate cuts in May and June.

Richard Grace said the money on financial markets is now firmly behind the growing chorus of bank economists forecasting rate cuts.

“If you look at the 30-day futures, which is a good measure of where interest rate expectations are, from a current cash rate of 2.5 per cent they’ve got interest rates priced down to 1.9 per cent by March 2016,” he said.

“The speculation around next week’s cut still remains around that 50 per cent probability, with 2.35 per cent priced in, but you’ve got almost a full rate cut priced in for March, so if they don’t move next month the speculation is they’ll move in March.”

Although, respected Bank of America Merrill Lynch chief economist Saul Eslake, who used to head ANZ’s economics department, believes there is no justification for further rate reductions.

If the RBA adopts the same view as Mr Eslake, Richard Grace said the Australian dollar could see a moderate, but he thinks short term, bounce.

“I think we could see a rise of half to three-quarters of a cent for the Australian dollar, but I think the Australian dollar would probably come under further downward pressure as the lower commodity prices and the stronger US dollar reassert themselves,” he added.

Irrespective of what happens at next week’s RBA board meeting on Tuesday, Mr Grace believes the Australian dollar still has further to fall.

CBA is forecasting it to hit 73 cents by June, before a slight recovery to around 75 cents by year end.

– ABC

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