SYDNEY (Reuters) - The Australian dollar slid to a two-month trough on Wednesday as data showed the domestic economy expanded at its slowest pace in two years last quarter, stoking speculation interest rates would have to be cut to rescue growth.
The Aussie dollar lost 0.7 percent to $0.7036 in the wake of the report, breaking strong options-related support at $0.7050. The next bulwark is in the $0.7000/20 zone.
Sentiment was badly bruised when data showed the Australian economy (GDP) grew just 0.2 percent in the December quarter, missing already lowered forecasts of 0.3 percent.
Annual growth slowed to 2.3 percent, with the second half of the year significantly weaker than the first half.
The slowdown is a challenge to the dogged optimism of the Reserve Bank of Australia (RBA) which kept interest rates steady this week on expectation of a pick up this year.
Earlier Wednesday, RBA Governor Philip Lowe stuck to the upbeat mantra suggesting the GDP numbers might be understating the true pace of activity given strength in employment.
He also played down fears falling house prices would derail the economy, arguing the wealth effect was limited.
Investors, however, clearly suspect risks are to the downside for growth and interest rates. U.S. investment bank JPMorgan shifted its view to tip easings in July and August.
Futures now imply a better-than-100 percent probability of a quarter point cut in the 1.5 percent cash rate by year end, up from 86 percent on Tuesday.
"Should the progress in the labour market falter over the next few months, the Bank will likely be forced to cut rates to support households," said NAB economist Kaixin Owyong.
"That said, our forecast is for no change to the cash rate in the foreseeable future, although we do see significant risk of a cut, a risk which has risen with these weak data."
All of which was sweet music to bond investors, with yields on three-year paper dropping 4 basis points to 1.62 percent. As recently as November, they had been up at 2.20 percent.
The three-year bond future rose 3.5 ticks to 98.365, while the 10-year contract added 3 ticks to 97.8795.
Across the Tasman, the New Zealand dollar was caught in the downdraught and fell 0.5 percent to $0.6767. Next support is at $0.6758 and $0.6720.
(Editing by Shri Navaratnam)
