The Australian dollar slumped as a shock widening in the trade deficit stoked speculation of more cuts in domestic interest rates, driving bond yields to two-month lows.

The dollar skidded to $US1.0206, its lowest since September 6, having easily knocked out options at $US1.0250. Charts show a break below $US1.0200 opens the way to $US1.0165, the September trough.

The Aussie has lost 1.5 cents since the Reserve Bank cut rates by 25 basis points to 3.25 per cent yesterday, citing a darker global background, falling export prices and a high currency.

‘‘I am pitching the AUD to break the low in September and put a major dint in the theory that it is ever-resilient to the global commodity cycle,’’ said Greg Gibbs, a strategist at Royal Bank of Scotland in Singapore.

The strength of the Aussie has confounded many analysts given the recent steep fall in some key resources prices.

The economic impact of lower export prices was all too clear in Australia’s trade deficit which blew out to $2 billion in August, its widest in three-and-a-half years and far larger than forecast.

That fed expectations of more rate cuts with interbank futures showing a two-in-three chance of an easing in November and rates of 2.55 per cent by March. Overnight indexed swaps indicate a cash rate of 2.65 per cent in 12 months.

The Aussie slipped across the board, with the euro stretching its legs to $A1.2632, its highest since mid-June. It tripped stops above $A1.2610 and was now eyeing $A1.2761. The euro has gained 1.7 per cent in 24 hours as the RBA rate cut forced heavy short-covering.

The Aussie was nursing hefty losses against the yen, sterling and Swissy, but managed to recoup some very modest ground against the kiwi. It was last at $NZ1.2423, having slid to $NZ1.2361, its lowest in more than a year.

The Aussie has lost five per cent since touching a seven-month high in late July as the prospect of more easing in Australia contrasted with New Zealand’s steady rates outlook.

‘‘At the moment, the kiwi is just being re-rated from what I would call exceptionally cheap to being cheap,’’ said ANZ Bank chief economist Cameron Bagrie.

The prospect of lower cash rates, saw Australian government bond futures rally to two-month highs with the three-year contract jumping to a peak of 97.750.

Reuters