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Rate cut gives the $A a pummeling

The Australian dollar has fallen well below 77 US cents after the Reserve Bank cut its cash rate for the first time in 18 months.

At 1700 AEDT on Tuesday, the local unit was trading at 76.63 US cents, down from 77.81 cents on Monday.

After the RBA’s decision to cut its interest rate to a new record low of 2.25 per cent, the currency plunged almost two US cents to 76.51, its weakest level since May 2009.

The RBA said it decided to cut due to the prospect of sluggish economic growth and a higher unemployment rate than earlier expected.

“The announcement gave Australian dollar bears all the incentive they needed to resume mauling the currency,” research analyst Chris Tedder said.

“The RBA continues to believe the Australian dollar is overvalued and should lower alongside continuing weakness in commodity prices.

“While the bank elected to cut the official cash rate and jawboned the Aussie some more, the whole statement by Stevens’ wasn’t overly dovish and, disappointingly, doesn’t provide the market with much guidance on what the board is planning to do at upcoming meetings.”

For most of 2014 it looked as though the next move for the cash rate would be a hike, as reinforced by governor Glenn Stevens’ repeated statements about “a period of stability in interest rates”.

But some economists began altering their forecasts in December, with economic growth slowing to its weakest pace in three and a half years.

At 1700 AEDT, the Australian dollar was at 89.65 Japanese yen, down from Monday’s close of 91.59 yen after hitting a one-year low, and at 67.63 euro cents, down from 68.82 euro cents.

Meanwhile, bond futures prices have shot to new record highs after the Reserve Bank cut the cash rate.

UBS interest rate strategist Andrew Lilley said the futures markets is pricing in another rate cut before the end of the year, the reason for such a sharp movement in bond prices.

“Once you take away that “period of stability” and regard it as a thing of the past then you open up the possibility of future rate cuts,” he said.

“And that’s what the bond market is looking towards, potentially a sub-two per cent rate before the end of the year.”

At 1630 AEDT on Tuesday, the March 2015 10-year bond futures contract was trading at 97.750 (implying a yield of 2.250 per cent), up from 97.585 (2.415 per cent) on Monday.

The March 2015 three-year bond futures contract was at 98.220 (1.780 per cent), up from 98.060 (1.940 per cent).

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