Monday during early deals, the Australian dollar slumped to new multi-day lows against most major counterparts on speculation that the Reserve Bank of Australia may reduce interest rate by 75 basis points to 4.50% tomorrow.
The markets have priced a 75 basis point cut, with a few expecting a bigger 100-basis point-reduction to weather the economic weakness. In early November, the central bank had cut its official cash rate target by 75 basis points to 5.25%.
Two weeks back, the Reserve Bank of Australia Governor Glenn Stevens said the monetary policy would be seeking to strike the right balance between the need to have inflation come back down, albeit slowly and the desire to avoid as far as possible an unnecessary weakening in demand. With regard to inflation, the central banker said after a fairly extended period of above-target inflation, the CPI inflation rate is expected to move back to its target over the next two to three years.
The Australian TD securities inflation, company operating profit and third quarter inventories are the major economic reports released during the session.
According to the latest report from the Australian Industry Group and PriceWaterhouseCoopers, activity in Australia's manufacturing sector fell sharply in November. The group's Performance of Manufacturing Index for November fell 7.7 points to a seasonally adjusted reading of 32.7.
The Australian bureau of Statistics said that business indicator data showed a 5.2 per cent jump in company gross operating profits for the September quarter. But the data, which is not considered market moving, had little effect on the domestic currency.
A private sector measure of inflation in Australia recorded a drop of 0.6 percent in November. The TD Securities/Melbourne Institute inflation gauge showed that inflation for the full year dropped 0.9 percent to 3.0 percent, the lowest reading since September 2007. The month-over-month inflation reading registered a 0.2 percent drop in October. The tamer inflation data increased expectations that the Reserve bank of Australia may cut the interest rate tomorrow as the slowing inflation is supportive for RBA rate cut.
The Australian stock market was trading lower, ending a two-day winning streak, despite modest gains posted by Wall Street on Friday. At 8:10 p.m. ET, the benchmark S&P/ASX 200 index was down 60.8 points or 1.6% at 3,681.7 and the broader All Ordinaries index was losing 48.8 points or 1.3% to 3,623.9.
Economists at Westpac said despite domestic the release of economic reports, the Australian dollar's movements remain subject to "negative equity market sentiment, with regional markets down and US equity futures pointing to a lower open at this stage." "As the equity markets remain weaker, it's likely we will see further weakness from here" they added.
The yen got a boost today as the slump in equities reversed investors' risk appetite. As a result, the Aussie fell to a 1-week low of 61.35 against the yen, compared to Friday's closing value of 62.54. On the downside, the aussie-yen pair may likely target the 56.9 level.
The Bank of Japan is planning an unscheduled emergency policy meeting early this week, according to various media reports, for the purpose of introducing a new system to lend money to financial institutions so that they can continue to provide loans for companies.
The plan would allow banks to use corporate bonds with lower credit ratings as collateral during the period of December through the end of the fiscal year in March, the reports said. The bank also expects to receive debentures that low-ranking companies issue in return.
Against the currency of US, the Australian dollar dropped to a 5-day low of 0.6443 during Monday's early trading. The pair that closed last week's deals at 0.6549 may likely find support near the 0.623 level.
From the US, the manufacturing report from ISM is slated for release at 10:00 am ET. The consensus is for the ISM's manufacturing purchasing managers' index to drop to 37.5 following October's level of 38.9.
Markets will also be interested to hear what Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson have to say when they speak at separate events in the afternoon.
In early trading on Monday, the Australian currency declined to a 5-day low against the Canadian dollar. At about 9:00 pm ET, the Aussie touched 0.8020 against the loonie, compared to 0.8105 hit late Friday in New York.
The Australian currency also declined against the euro during Monday's early trading. The Aussie that was worth 1.9402 against the euro at Friday's close, hit a low of 1.9613 at about 9:05 pm ET.
The major economic reports scheduled for the European session are German retail sales, SVME November PMI, the British M4 money supply report and manufacturing PMI reports from Italy, Germany, Britain and Euro-Zone.
Canadian GDP data for the third quarter has been scheduled to be released later in the New York session. Economists are expecting GDP to show 8% growth following 0.3% growth in the second quarter.
The New Zealand dollar also tumbled today on expectation of a bigger 150 basis points rate cut to 5.00% when the Reserve Bank of New Zealand meets on Wednesday. The Australian and New Zealand dollars tend to move in the same direction, as both are high-yielding currencies favored by investors for carry trade.
The New Zealand stock market pared gains after opening higher. At 7.45 P.M. ET, the benchmark NZX 50 Index was losing 13.59 points, or 0.50%, to 2,697.36 and the broader NZX All Capital Index was declining 13.48 points, or 0.49%, to 2,742.46.
On October 23, the Reserve Bank of New Zealand slashed the nation's key interest rate by 100 bps to 6.5% in order to weather the global slowdown. In a statement accompanying the decision, RBNZ Governor Alan Bollard said the move was made in light of dual economic problems. "Ongoing financial market turmoil and a deteriorating outlook for global growth have played a large role in shaping today's decision," said Bollard.
In early trading on Monday, the New Zealand dollar dropped to a 6-day low versus its Japanese and US counterparts. At about 11:05 am ET, the kiwi touched 51.59 against the yen and 0.5411 against the US dollar, compared to Friday's closing values of 52.56 and 0.5502, respectively. The next likely target level for the NZ dollar is seen around 50.2 against the Japanese unit and 0.528 against the US currency.
Against its European counterpart, the New Zealand dollar edged down to 2.3437 during Monday's early trading. This may be compared to last week's closing value of 2.3108. If the Aussie slips further, it may likely find support near the 2.39 level.
The New Zealand dollar fell to a 2-month low of 1.1983 against the Australian dollar by 12:20 am ET Monday compared to Friday's close of 1.1910. The next downside target for the NZ kiwi is seen around the 1.214 against the Aussie.
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