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FOREX-Aussie set for biggest drop in a year on central bank swerve

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LONDON, Feb 6 (Reuters) - The Australian dollar slumped on Wednesday and is on track for its biggest single day drop against the greenback in a year after the central bank signalled a possible interest rate cut in a stunning shift from its long-standing tightening bias.


The policy shift caught investors off-guard as the previous day the Reserve Bank of Australia had steered clear of an easing signal when holding its official cash rate at a record low 1.50 percent. Traders rushed to dump the commodity-linked currency against the Japanese yen, a pair usually favoured when risk appetite is strong as has been the case for most of January, forcing violent moves and reverberating across currency markets.


"The Australian dollar is the biggest story in the currency markets today," said Kenneth Broux, a currency strategist at Societe Generale in London. "Selling Australian dollar versus the Japanese yen has rippled over to other currencies."


The Aussie slumped 1.6 percent to 78.25 yen , its lowest level since late-January. It fell 1.4 percent against the Swiss franc.


The Australian dollar plunged 1.5 percent to $0.7133, set for its biggest daily drop in a year, and market analysts rushed to change their interest rate forecasts.


The sharp selloff in the Australian dollar also weighed on the New Zealand dollar and the Canadian dollar with both these currencies down half a percent against the greenback.


The moves were equally violent in the bond market with shorter-dated Australian government bond yields set for their biggest daily drop in more than two years.


DOLLAR FIRM


Elsewhere, the dollar settled near a two-week high versus its rivals as U.S. President Donald Trump's State of the Union speech failed to surprise currency traders, with markets more focused on the near-term outlook for monetary policy.


Both the U.S. Federal Reserve and the European Central Bank have signalled a cautious monetary outlook in recent days with the Fed's pause proving a relatively bigger surprise for markets.


Weak data has dogged eurozone policymakers but some officials are reluctant to alter guidance on interest rates as a move could tie the hands of the central bank's next president months before an appointment is made, according to sources. As a result, the euro has failed to shake itself out of the broad $1.13-1.15 range it has traded within for the last three months.


"Markets are becoming increasingly sensitive to the outlook for monetary policy and any shifts or changes in thinking can trigger large moves," said Thu Lan Nguyen, a forex strategist at Commerzbank in Frankfurt.


In an annual speech on Tuesday outlining his priorities for the coming year, Trump said illegal immigration was a national crisis and reiterated his vow to build a border wall. The pound remained on the back foot following a slump overnight. The currency was a shade lower at $1.2930 after brushing $1.2923, its lowest since Jan. 22.


Sterling had lost nearly 0.7 percent on Tuesday on a weak Purchasing Managers' Index data and uncertainty about Brexit talks.


(Reporting by Saikat Chatterjee;
Editing by Andrew Cawthorne and Kirsten Donovan)

Reuters Messaging: saikat.chatterjee.reuters.com@reuters.net))
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