Australian Dollar to US Dollar (AUD/USD) Currency Pair Slumps to 5 ? Year Low

The Australian Dollar posted extensive, broad-based declines off the back of the Reserve Bank of Australia’s decision to cut the benchmark interest rate. The RBA has maintained a policy of steady interest rates since 2013 but felt that with the current inflationary climate and recent declines in the price of crude oil, borrowing costs needed to be cut. The central bank also cited the relative strength of the Australian Dollar as a reason for taking action. The interest rate was cut by 25 basis points to 2.25% - a new record low. In a statement accompanying the decision the RBA noted; ‘A lower exchange rate is likely to be needed to achieve balanced growth in the economy. The economy is likely to be operating with a degree of spare capacity for some time yet.’

After the decision was announced the Australian Dollar fell by more than 1.7% against peers including the US Dollar, Pound, Euro and Canadian Dollar. The Australian Dollar to US Dollar (AUD/USD) exchange rate tumbled to a new five and a half year low. Currency strategist Neil Mellor said of the decision; ‘This is about central banks recognising that there is no advantage to staying their hand. In terms of the action in the Aussie I don’t doubt we’ve got a little further to go. We could see some sizable moves.’

The Australian Dollar held declines into the European session and could experience further fluctuations following the publication of Australia’s AiG Performance of Service Index. The gauge of the services sector came in at 47.5 in December. If it moved closer to the 50 mark separating growth from contraction in January, the ‘Aussie’ may be modestly boosted. China’s Composite/Services PMI for January will also be of interest. As the week continues, other Australian reports with the potential to insight movement in the domestic currency include HIA New Home Sales, NAB Business Confidence, Australian Retail Sales and the Reserve Bank of Australia’s statement on Monetary Policy. The direction taken by the ‘Aussie’ may also be dictated by fluctuations in the commodities market and US data releases.