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RBA easing threatens to "cut Aussie's legs off"

Carolyn Hebbard | Moment | Getty Images

With Australia's feeble economic performance raising the specter of interest rate cuts to fresh record lows, what does this mean for the trodden down Aussie dollar?

A whole lot more pain, according to foreign exchange strategists, who see the currency tumbling below $0.80 next year to levels not seen since mid-2009.

The commodity-linked currency has declined 6.6 percent against the U.S. dollar year to date, hurt by a combination of a strengthening greenback and Australia's deteriorating terms of trade. It is currently trading at a four-year low of $0.83.

Rate cut threat

Charlie Aitken, executive director at Bell Potter Securities expects the Reserve Bank of Australia (RBA) to cut its cash rate by 50 basis points to 2.00 percent next year, driving the Aussie down to $0.75 – 11 percent lower from current levels.

"The absolute and relative yield of the AUD will fall in 2015, particularly vs the U.S. Dollar, and that will cut its legs off," he said.

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The global search for yield has played key role in supporting the Australian dollar in recent years. Further rate cuts would undermine its yield advantage against the U.S. dollar.

"The first stop will be $0.80 and the next stop $0.75. Sell it while you still can with an '8' in front of it," he added.

Boris Schlossberg, managing director of FX Strategy at BK Asset Management agreed monetary easing would spell further trouble for the currency.

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"Rate cut definitely erodes the Aussie value especially if U.S. eventually starts to hike and the rate differential narrows. The [pair] could drop to $0.80 if a rate cut looks imminent," he said.

Easing expectations

Australia's anemic growth in the third quarter has given rise to expectations that the Reserve Bank of Australia (RBA) will soon lower borrowing costs, which have been kept at a record low of 2.50 percent since August 2013.

The economy expanded 2.7 percent on year, undershooting expectations for growth of 3.1 percent, as construction spending fell, while sliding export prices hit incomes.

Read MoreAustralia holds rates as speculation mounts for cuts

Following the gross domestic product data, Goldman Sachs changed its Australia's rate outlook, calling for a 25 basis point rate cut in both March and August. It previously expected rates to remain on hold.

"The rationale for a cut is strong in our view," Tim Toohey, head of Macro Research in Australia and New Zealand at Goldman Sachs wrote in a note, citing a benign inflation outlook, rising unemployment and stalling growth among other factors.

The bank also lowered its forecasts for the Australian dollar to $0.83, $0.81 and $0.79 on a 3, 6 and 12-month basis. It previously forecast the Aussie at$0.82 on a 12-month horizon.