Following the yen: The Australian dollar followed the yen down against the US dollar in a steep mid-morning dive. Photo: Graphic:Les Hewitt
The Australian dollar plunged below US93¢ for the first time in more than a week, dropping in the wake of a weakening yen and as the Reserve Bank of Australia continued its mild jawboning of the currency.
The local currency started its downward dip shortly after 11am AEST, dropping from US93.35¢ in early morning trade to US92.85¢ within 30 minutes as it shadowed a similar drop in the Japanese currency against the greenback.
The drop in the yen was triggered by speculation over Japanese government pension fund reform, according to Commonwealth Bank of Australia chief currency strategist Richard Grace.
On Tuesday morning the Nikkei newspaper reported Prime Minister Shinzo Abe may appoint a vocal proponent of Japan's pension fund to the health and welfare ministry in a cabinet reshuffle on Wednesday.
Mr Grace said the potential reshuffle caused the yen to weaken as the market anticipated an increased emphasis on foreign assets ahead of the formal review of the fund later this month.
He said CBA expected the yen to weaken further over the coming year, but kept its forecast for the Aussie against the greenback at US94¢ by the 2014 end.
The dollar hardly reacted to a spate of local economic data, including second-quarter current account balance and July building approvals. The current account deficit blew out to $13.7 billion, from $7.8 billion in the first quarter, while building approvals rose 2.5 per cent month on month. Both sets of data more or less met economist expectations.
The fall in the Australian dollar also came ahead of the Reserve Bank's widely expected decision to keep the cash rate on hold for a 12th consecutive meeting.
"The exchange rate ... remains above most estimates of its fundamental value, particularly given the declines in key commodity prices. It is offering less assistance than would normally be expected in achieving balanced growth in the economy," Mr Stevens said.
Westpac chief currency strategist Robert Rennie said the sudden slide in the Australian dollar earlier in the day was driven by the weaker yen against the greenback, affecting the Australian and Japanese cross rates.
"The Japanese demand for the Aussie has been dwindling as it is getting too expensive", Mr Rennie said.
The yen dropped from US0.9586¢ around 10.30am to US0.9536¢ on Tuesday afternoon.
Mr Rennie said a series of business surveys indicating weak Japanese gross domestic product print triggered the fall of the Japanese currency against the US dollar, which in turn reduced the Japanese demand for the Aussie.
"As we wander through early September you start to get business surveys that give you a reasonable sense of GDP. Those are fairly closely watched," Mr Rennie said.
On Westpac numbers the Australian dollar is forecast to hit US90¢ by December before starting recovery next year.