Aussie dollar heading for worst day in two years

The Aussie dollar been slammed following the RBA's announcement a rate cut was likely. Photo / 123RF

The Australian dollar is on track for its worst one-day fall in nearly two years following Reserve Bank boss Philip Lowe's comments a rate cut was likely with growing concerns over the local economy.

The Aussie dollar fell 1.35 US cents in the 24 hours between midday yesterday and today in response to the RBA governor's admission the economy may be weaker than expected.

It was buying 71.03 US cents at noon and economists say it will crash well below 70 US cents if the rate is cut, with one expecting a fall as low as 65 US cents.

The central bank on Monday kept the rate at a record low of 1.5 per cent for 30 consecutive months in the wake of the banking royal commission's damning report into the finance sector and accelerating house price declines in Sydney and Melbourne.

For months on end, Lowe had maintained a lift in the cash rate was the most likely move, but he told the National Press Club in Sydney the RBA might need to change that outlook.

"Over the past year, the next-move-is-up scenarios were more likely than the next-move-is-down scenarios," he said.

"Today, the probabilities appear to be more evenly balanced."

But economists are more bullish the central bank will be forced to lower rates twice by December, likely in the second half of the year after a federal election.

MacroBusiness Fund chief strategist David Llewellyn-Smith said the local share market had an artificially inflated view on the Australian economy because of the central bank's position.

"They haven't really priced the coming Australian slow down, which is what the RBA basically recognised yesterday by turning neutral," he told news.com.au.

"The likelihood is that they will have to cut because house prices nearly always draw the broader economy into weakness, and they're falling very fast in Sydney in Melbourne and are now falling in all major capitals."

Llewellyn-Smith said the Aussie dollar would be worth 65 US cents by the end of the year.

"We think they'll have to cut twice and that's going to put a lot of downwards pressure on the Aussie dollar."

AMP Capital chief economist Shane Oliver agrees the RBA will have to cut rates twice this year, which will trigger the Aussie dollar to fall below 70 US cents, but he says strong commodity prices will ensure a slide isn't as dramatic as Llewellyn-Smith predicts.

Dr Oliver told news.com.au the expected US rate hike would compound the weakness of the Australian currency.

"If our interest rates have been falling below those in the US, then that just makes it less attractive to park your money in Australian dollars versus US dollars," he said.

"And that will put more downwards pressure on the Aussie, pushing it into the 60s."

Westpac senior currency strategist Sean Callow said a cut would equal a "very sharp fall in the Aussie".

"I would confidently say that almost regardless of what happens in the rest of the world," he said.

"If this is really seen as weakness that's Australia-focused, if we're easing because we've got problems of our own and the US economy is still running pretty well, that's when we're talking 68 US cents."