Commodity currencies may face a race to the bottom as the Bank of Canada's surprise rate cut sent the Canadian dollar to five-year lows and could pressure Australia's central bank to follow suit.
"The reason [the Bank of Canada] cut rates is largely weaker oil prices. Australia is also a commodity exporter. The market could be excused for anticipating the RBA (Reserve Bank of Australia) would adopt a similar viewpoint," said Greg Gibbs, senior foreign-exchange strategist at RBS.
Discussions among market participants of whether successive rounds of central bank easing are making for a "tacit currency war" are increasing, he said.
Race to the bottom
On Wednesday, the Bank of Canada (BOC) cut its benchmark rate to 0.75 percent from 1 percent, its first rate change since late 2010, and cut its inflation and growth forecasts, citing the more than 50 percent decline in oil prices since mid-2014. The Canadian dollar, also known as the loonie, tanked, shedding as much as 4 percent against the dollar compared with Tuesday's levels. The U.S. dollar was fetching around 1.2354 Canadian dollars in Asian trade Thursday, off Wednesday's high of 1.2394 Canadian dollars, levels not seen since 2009, during the Global Financial Crisis.