Aussie dollar takes steep dive

The Australian dollar has seen another dramatic sell-off this morning, plunging to its lowest in 19 months after strong US economic data was released overnight.

Shortly after 9am, the aussie suddenly dropped about half a US cent to a trough of US95.55c, about US1c lower than late yesterday. It briefly recovered to US95.78c, before falling back to a new low of US95.47c around midday, its weakest since October 5, 2011.

It was also under pressure against other major currencies, trading at 97.5 yen and 74.35 euro cents.

The Australian dollar has now fallen almost 6.8 per cent against the greenback since May 6.

The kiwi is currently trading about US80.70c and 84.30 Australian cents.

Greenback muscles up

Westpac chief currency strategist Robert Rennie said the Australian dollar was falling faster than expected on the back of better-than-expected US economic data.

"Ten-year yields in the US, following on from the very good run of economic data, were reaching highs of 2.17. That is the highest level that we've seen in US yields back to April of last year," Rennie said. "That is a support for the US dollar. It's very a stronger dollar story that is driving the weaker Aussie."

He said the currency was at risk of falling as low as 93 US cents in the short-term, and its movements would be dependent on upcoming local economic data such as capex, the Reserve Bank of Australia's board meeting next week and first-quarter gross domestic product figures.

Richard Yetsenga, ANZ's head of global markets research, said US96c had been a key support level for the Australian dollar.

"It just went through some stops and through 96," Yetsenga said. "The underlying trend in the Australian dollar is down as capital reallocates away from Asia and the commodity currencies. I think this morning's price action needs to be considered within that broader context."

More rate cuts seen

The currency fall came as world's biggest bond fund flagged further interest rate cuts as the mining slowdown hits in a report released this morning.

Pacific Investment Management Company said lower interest rates would be required to support local demand - such as non-mining investment, consumer consumption and housing construction - as the country transitions away from mining-assisted growth.

Pimco's analysts, Adam Bowe and Robert Mead, said Australia was joining other countries around the world in a "New Normal", which was previously described as slower economic growth, a greater role for governments in regulating the economy, and more cautious consumers.

"After avoiding the worst of the ravages of the global financial crisis with the aid of significant policy stimulus from China that helped boost demand for bulk commodity exports, Australia has so far escaped the clutches of the global New Normal," the analysts wrote.

"However, as domestic growth outside the mining sector remains subdued and Australian policy rates appear likely to converge towards their global peers', we believe the New Normal has finally arrived down under."

US economy strengthens

Overnight, US house prices recorded their biggest gains since 2006, while US consumer confidence rose in May for a second consecutive month to a five-year high.

The data gave investors more reason to believe the US Federal Reserve would taper off its US$85 billion a month bond buying programme, designed to encourage banks to lend.

"It is a resurgent US dollar, and that is a story that is hurting all currencies, including the Australian dollar," Rennie said.

At the same time, markets in Australia are nervous ahead of the capital expenditure expectations report out tomorrow, which will indicate companies' future spending plans.

The Bureau of Statistics is also set to release March quarter construction work done figures today.

Dollar tipped to fall further

ANZ revised its forecast for the Australian dollar against its US counterpart "substantially lower" today, and expect the currency to reach US92c in December and US89c by June next year.

"Any slippage below 0.9550 could also trigger an early retest of the 0.9390-0.9410 area," ANZ's currency strategists said in the report.

Westpac's Rennie said a spate of US economic data set to be released in the US next week - including the latest manufacturing and jobless figures - would play a critical role for the near-term path of the dollar.

"Those are all important factors, but I would certainly anticipate that as we start to move into the low 90s - 93 to 94 US cents - that we will start to see some more demand coming through for the Aussie," Rennie said.

"It means that we've had a material correction."

Last week, currency strategists tipped the Australian currency would slip as low as US85c by May next year and rediscover its historic link to commodity prices.

Brokerage Credit Suisse was the most bearish, with the global investment bank predicting it to shift to a low of US85c by next May.

Credit Suisse said it had been "too timid" in its previous forecasts and forecast the Australian dollar to fall to US92c within three months.

HSBC said it was the strength in the US dollar that would be the key driver for the direction of the local currency, and lowered its year-end estimate for the Australian dollar to US90c from US95c.

UBS, meanwhile, revised down its year-end and mid-2014 forecasts to US95c and US90c respectively.

Sydney Morning Herald