Australian Dollar Trades Lower As RBA Debelle Flags Further Rate Cuts

The Australian dollar traded lower against its major counterparts in the Asian session on Tuesday, after the Reserve Bank of Australia deputy governor outlined various monetary policy options including foreign exchange intervention and negative rates to combat the financial downturn arising from the lockdown due to the coronavirus pandemic.

Speaking to the Australian Industry Group, Guy Debelle said that the board is assessing other policy options as the outlook for inflation and employment is not consistent with the bank's objectives in future.

One option is to buy bonds further out along the curve, supplementing the three-year yield target. Purchases would still be conducted to maintain the target for the three-year bond, but additional purchases could occur further out the curve on a regular basis, he said.

Foreign exchange intervention is another potential policy option, Debelle suggested. But it is not clear whether this would be effective in the current circumstances as the currency was "aligned with fundamentals."

Next option is to lower the current structure of rates in the economy a little more without going into negative territory.

The fourth option is negative rates, although Debelle said that empirical evidence on negative rates is mixed.

Debelle said the economic recovery had not been a rapid bounce but more of a slow grind. The virus is having its impact due to the lockdown in Victoria, he added.

The aussie eased off to 1.0803 versus the kiwi, from a 5-day high of 1.0851, and held steady thereafter. At yesterday's close, the pair was worth 1.0831.

The aussie depreciated to a 1-1/2-month low of 75.17 against the yen and near a 2-week low of 1.6345 against the euro and held steady afterwards. The aussie had closed Monday's deals at 75.58 against the yen and 1.6294 against the euro

The aussie extended decline against the greenback, touching 0.7187. This was the weakest level since August 26. The greenback is seen facing support around the 0.70 mark.

The aussie dropped to 0.9580 versus the loonie, after rising to 0.9622 at 8:30 pm ET. Should the greenback falls further, it is likely to test support near the 0.94 region.

Looking ahead, Eurozone flash consumer sentiment index for September is set for release at 10:00 am ET.

Simultaneously, U.S. existing home sales for July will be featured.

At 10:30 am ET, Federal Reserve Chair Jerome Powell will testify on the the CARES Act before the House Financial Services Committee in Washington DC.