RBA cuts cash target rate to record low sending Aussie dollar near six-year low

RBA Governor Glenn Stevens — Reserve Bank of Australia governor Glenn Stevens. RBA unexpectedly cuts rate cut weakening Aussie dollar to a near six-year low. REUTERS

The Reserve Bank of Australia (RBA) has unexpectedly cut the main cash target rate to a record low of 2.25%, sending the Aussie dollar to a near six-year low against the greenback.

The RBA said Australian growth is continuing its below-trend pace and the local dollar remains above its fundamental value despite the sharp fall in recent months.

"Overall, the bank's assessment is that output growth will probably remain a little below trend for somewhat longer, and the rate of unemployment peak a little higher, than earlier expected," RBA governor Glenn Stevens said in the policy statement.

About the Australian dollar, the bank said: "It remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices. A lower exchange rate is likely to be needed to achieve balanced growth in the economy."

The AUD/USD fell to 0.7650 following the rate cut, making an instant 1.5% slide, and at the trough on Tuesday, the pair was at its weakest point since May 2009.

The pair has fallen more than 6% so far this year, and from end-June, when the commodity slide began, the Aussie dollar is down more than 18% against the greenback.

The RBA has been on a rate cutting cycle since late 2011 when the main policy rate was 4.75%. The last cut was in late 2013 which was also a 25 basis points reduction.

The RBA said the fall in energy prices can be expected to offer significant support to consumer spending, but added that the decline in the terms of trade is reducing income growth.

The central bank said measures of underlying inflation in Australia declined too, adding to the downward pressure on interest rates.

As long as the 0.8500 resistance holds, the Australian dollar has more risks on the downside and it seems headed for 0.7500.

A break of that will open doors to 0.7240, which is not likely to be as strong as 0.7000. Then comes the 0.6773-0.6690 range a break of which will take the pair down to the 0.60 levels quite easily.