Aussie dollar gets destroyed after RBA cuts rates

Australia has joined the monetary easing party.

The Reserve Bank of Australia just announced a 25 basis point interest rate cut, and now the Aussie dollar is getting destroyed.

On Monday night, the RBA announced it would take its main interest rate to 2.25% from 2.50%, making Australia the latest in a string of central banks that have embarked on interest rate cuts and easier monetary policy of late.

In its announcement, the RBA said “The Australian dollar has declined noticeably against a rising US dollar over recent months, though less so against a basket of currencies. 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.”

In its statement, the RBA also noted the Australian economy continues to grow below-trend, while the unemployment rate is now expected to peak at a higher level than had been previously forecast. The RBA added that it now expects the Australian economy to operate “with a degree of spare capacity for some time yet.”

This decision from the RBA was an out-of-consensus move, as Bloomberg’s Michael McDonough noted following the announcement that just 7 of 29 economists polled by Bloomberg expected the RBA to cut rates in its announcement.

Here’s the chart of the Aussie getting clobbered against the US dollar.

After the RBA’s announcement the Aussie took an initial leg lower, and has been extending losses against the US dollar. Near 10:50 pm ET Monday, the Aussie dollar was off more than 1.7% to around $US0.765 against the US dollar — its lowest level against the dollar since spring 2009.

In addition to the Aussie dollar’s weakness Monday night, the New Zealand dollar, or the kiwi, was also tumbling; falling about 0.7% to around $US0.72 to the US dollar.

This is a continuation of weakness for the kiwi that began last week after the Reserve Bank of New Zealand kept interest rates unchanged, but said that the kiwi’s relative strength to other currencies was “unjustified.”

Here’s Monday’s drop in the kiwi.

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