Traders were caught napping when the Australian dollar crashed to a seven-month low in the space of minutes late on Monday, with the currency hit by a global sell-off as concerns spread about the prospect for Chinese growth.
The fall came as more than $21 billion was wiped from the local sharemarket, which shed 1.5 per cent for the second-biggest fall of the year on the back of a large and unexpected sell-off on the Chinese sharemarket.
The benchmark S&P/ASX 200 Index lost 75.6 points to 5010.5.
The surprise drop in both the dollar and the sharemarket on the eve of Tuesday's Reserve Bank board meeting left some traders millions of dollars out of position.
The dollar fell from US102¢ to US101.16¢, the lowest it has been since July last year, in response to an announcement by China's central bank that it was clamping down on speculative property investment. Stocks in China suffered heavy losses as investors feared a potential slowdown in the world's second-largest economy.
This news hit an already weakened dollar, which has shed 4¢ since late January in the face of a resurgent greenback. Now strategists say the dollar could be heading lower after it surprised everybody by breaking through a key support level of US101.50¢ on Monday.
"It's safe to say the whole market underestimated how seriously the Chinese market would take the rules," Westpac senior strategist Sean Callow said.
"A lot of us assumed that today was not the day to break through US101.50¢ because Tuesday's the exciting day right? We've got the RBA and retail sales, and then GDP on Wednesday, so you would think that Monday would just be a quiet day. But I think the market's been caught napping a bit," he said.
Financial markets' expectations of a Reserve Bank rate cut dropped to 13 per cent following the release of the data, from a forecast of 17 per cent, the lowest since the RBA last met on February 5.
The markets are pricing in two 25 basis points of cuts this year.
Rochford Capital director of market risk Derek Mumford said the overall downward pressure on the Australian dollar would be welcomed by the Reserve Bank. "The fact that the [Australian dollar] is coming off, going by their recent comments, reduces the chances of further rate cuts," he said.
"I do think the RBA considers that rates are at very low levels historically. The RBA won't be rushing into any unnecessary cuts at this stage."
Last week, a better-than-expected forecast of 2013-14 private new capital expenditure, coupled with a lift in new home sales, also eased pressure on the RBA.
The Reserve was likely to look through the mixed set of economic data released on Monday and keep interest rates on hold at its board meeting, economists said.
Data on Monday showed job advertisements rose in February for the second month, while a TD Securities inflation gauge remained flat for the same month.
But private sector housing construction remained weak in January, as company gross operating profits fell 1 per cent for the December quarter.