Bloomberg News

Aussie Dollar Drops, Yields Tumble After RBA Rate Cut

May 01, 2012

Australia’s dollar plunged and its bond yields sank to record levels after the country’s central bank cut interest rates by more than economists forecast.

Government bonds advanced, sending rates on 5-, 10 and 15- year debt to all-time lows after the Reserve Bank of Australia lowered its overnight cash rate target to 3.75 percent from 4.25 percent, the deepest cut in three years. The so-called Aussie slid against all of its major peers as data today showed the nation’s home prices declined and a manufacturing gauge declined to a seven-month low.

“I was expecting a 25 basis-point cut at this meeting,” said Derek Mumford, a director in Sydney at Rochford Capital, a currency risk management company. “You’d be worried they’re cutting 50 basis points at this time and how aggressive they’re going to be down the line. I think the Aussie could test parity in the next three to six weeks.”

The Australian dollar dropped 1 percent to $1.0327 as of 4:46 p.m. in Sydney. It lost 1.1 percent to 82.33 yen. The nation’s 10-year bond yield fell as much as 14 basis points to 3.534 percent. Five-year rates slid as low as 2.937 percent, 18 basis points less than yesterday’s close. The 15-year security, the longest dated government bond, declined 14 basis points to 3.863 percent.

New Zealand’s dollar weakened versus 15 of its 16 most- traded counterparts, losing 0.5 percent to 81.45 U.S. cents and 0.6 percent to 64.95 yen.

Half-Point Cut

Only two of 29 economists surveyed by Bloomberg News predicted the RBA’s decision to cut its benchmark by 50 basis points. The other 27 forecast a quarter-point reduction.

The half-point cut was “judged to be necessary in order to deliver the appropriate level of borrowing rates,” RBA Governor Glenn Stevens said in a statement. In the next year or two, “inflation will probably be lower than earlier expected” and within the central bank’s target range of 2 percent to 3 percent, he said.

Data last month showed consumer price inflation slowed to 1.6 percent in the first quarter from a year earlier, the slowest annual pace since the third quarter of 2009, and compared with economists’ forecast of a 2.2 percent increase.

“The base scenario was for 25 basis points of interest- rate reduction, so 50 was a bit of a surprise,” said Michiyoshi Kato, senior vice president of foreign-currency sales in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan’s second-largest bank by assets.

Home Prices

An index measuring prices for established houses in eight major Australian cities dropped 1.1 percent last quarter from the previous three months, the government said today. A gauge of the country’s factory output fell 5.6 points to 43.9 last month, according to a survey by the Australian Industry Group and PricewaterhouseCoopers.

Demand for the so-called Aussie and kiwi was also limited amid concern Europe’s debt crisis is weighing on global growth.

Spain will auction three- and five-year notes on May 3. Yields on the nation’s 10-year bonds climbed above 6 percent last month, stoking speculation the euro area’s fourth-largest economy would follow Greece, Ireland and Portugal in seeking a bailout. Spain’s economy entered its second recession since 2009, a government report showed yesterday.

Downside Risks

In China, a purchasing managers’ index rose to 53.3 in April from 53.1 a month earlier, the nation’s statistics bureau and logistics federation said in a statement today. The median estimate of economists in a Bloomberg survey was for a reading of 53.6. Levels of 50 or more indicate expansion. China is Australia’s biggest trading partner and New Zealand’s second largest export market.

U.S. factory orders probably declined 1.7 percent in March from the previous month, when it rose 1.3 percent, according to median estimate of economists surveyed by Bloomberg. The Commerce Department is due to release the data tomorrow.

“Global growth is not exactly strong, and I think the risk is still to the downside from Europe, U.S. and China,” said Rochford’s Mumford.

-- With reporting by Hiroko Komiya in Tokyo. Editors: Rocky Swift, Ken McCallum

Mariko Ishikawa in Tokyo at +81-3-3201-3654 or mishikawa9@bloomberg.net;

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net


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