Market expectations are building that the Reserve Bank could push through a 25 basis point interest rates next week to help spur demand and confidence in the economy.
The recent shift in sentiment, combined with improving prospects for Europe and the US, has seen the Australian dollar fall by more than 1 cent over the past two days and to be down 4 cents since the start of the month.
Around midday, the Australian dollar was trading at $US1.038. It was also buying 85.7 yen and 77.8 euro cents.
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This morning the market was tipping a 41 per cent chance of a rate cut when the RBA meets on Tuesday for its monthly board meeting, according to investment bank Credit Suisse's index of interest rate futures.
This figure has steadily increased since the RBA last met early this month, when chances of a rate cut in April were as low as 20 per cent. At the start of this week the index was pricing in a 27 per cent chance of a cut.
The bulk of financial economists are still tipping the RBA will start cutting rates from the middle of the year.
The interest rate futures index is derived from the average RBA cash rate pricing implied by the funding and credits costs of major banks and institutional investors.
“Recent communications by the RBA suggest to us that the market is under-estimating the chances of a reduction in the official cash at next week’s RBA Board meeting,” said ANZ economist Ivan Colhoun.
While Mr Colhoun expects a 25 per cent cut at the RBA’s May meeting, he believes “a move next week cannot be ruled out”.
Influencing the RBA’s decision are signs retail sales growth had softened since mid 2011, a soft housing market and little growth in employment.