There was an even sharper rally on the safe-haven yen as the Aussie rebounded to 71.45 yen from a decade-low around 69.93. Likewise, the kiwi was clinging to $0.6370 after carving out a four-year trough of $0.6342 overnight. Both were aided when China again fixed its yuan at a firmer midpoint level than many expected, lessening pressure on other currencies to depreciate to keep exports competitive.
Futures imply a 68% chance rates could be cut by a quarter point to 0.75% in October, with a move by November fully priced in. Another easing to 0.5% is seen by April at the latest. Speaking on Tuesday, RBA Deputy Governor Guy Debelle said 0.5% was around the floor for rates seen in some other developed nations, though he hoped they would not have to go there.
He also noted that a further fall in the Aussie would be helpful for the economy and that the ratio of Australia's current account deficit to GDP is the smallest in decades, making the country less vulnerable to external shocks. Investors are also wagering on more cuts from the Reserve Bank of New Zealand (RBNZ) following its surprisingly sharp half-point easing to 1% earlier this month. A move to 0.75% is seen as a better-than-even chance, and is fully priced by February.
Yields on New Zealand two-year paper are already down at 0.83%, having touched all-time lows of 0.75% a couple of weeks ago. Australian three-year yields hit a fresh record low of 0.617% on Monday and were last at 0.698%. The 10-year bond future contract eased 3.5 ticks on Tuesday to 99.0750, implying an yield of just 0.925%.