ForexSpace.com - The Reserve Bank of Australia’s shock decision to slash interest rates by a deeper-than-expected 50 basis points has left the currency in free fall. At the time of writing, the Aussie had tumbled 0.9 percent to US$1.0324 according to live forex charts, a three-month low near 82 yen thanks to the surprise move which overshot forex broker predictions by around 25 basis points. The rate now sits at 3.75 percent, cut from a previous 4.25 percent.

The Aussie also ended up trading near a five-month low against the GBP, which rose above A$1.5700 despite a weaker than expected survey of the UK manufacturing sector which pushed the British currency down versus the US dollar.

Chinese data

The AUD declines came despite positive manufacturing data from China which showed a growing sector and would otherwise have boosted the Australian currency with promise of more demand for resources. Kathleen Brooks, FOREX.com's research director, told this site: "The China data wasn’t enough to help the Aussie, which dropped sharply after the RBA cut interest rates by 50 basis points. The market had priced in about 30 basis points of tightening, so this was a surprise to the market.”

But Brooks goes on to assert that trader attention should now switch to the future. “The focus now is on what the RBA will do next”, she added. “The statement that accompanied the cut did not give too much away, although the RBA said global growth had moderated, it also said that a deep downturn was not occurring.” Stating instead that analysts felt the emphasis was on “downside risks to inflation” as opposed to growth.

Further cuts?

Forex brokers and economists are now concerned about the possibility of further cuts, particularly after the RBA spoke of a desire to ease financial conditions which have recently been struck by lower-than-expected inflation and economic growth. “In our view, the risk of further cuts has clearly risen and we remain bearish on the Australian dollar,” analysts at Credit Suisse said.

But others have spoken to the contrary, citing the overall strength of the Aussie in forex charts as a barrier to a series of further cuts. “It [the RBA] still forecasts prices to remain within its target 2-3 percent range”, Brooks told this site. “It mentioned that the Aussie remains high even though the terms of trade have deteriorated, thus it could cut further, however, we think there may be only one cut in the coming months bringing the target rate down to 3.5 percent. Thus, we don’t believe that the RBA is embarking on a prolonged cutting cycle, unless there is an external shock that threatens the Australian economy and the trajectory for inflation."

Meanwhile, investors at Morgan Stanley echoed the view, saying that the depth of the cut should actively reduce the risk of any further blows. Others have identified the Aussie’s attractive interest rate amongst major currencies; now standing at 3.25 perecnt.  "The Aussie has further to go down in the near term but I would be surprised if it went below the April lows around $1.0225," said Ian Stannard, Head of European FX Strategy at Morgan Stanley. "The fact that the RBA moved more aggressively this time should reduce the risk of follow-up cuts and ultimately provide support to the currency," he added.

Sarah Cox, Writer