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Aussie dives below $0.70 as China slowdown hurts

John Phillips | Digital Editor | CNBC

The Australian dollar (Exchange:AUD=) cracked below the key psychological level of $0.70 for the first time in over six years on Wednesday as investors shunned the currency amid concerns around China's darkening economic outlook, the rout in commodities and sluggish domestic growth.

The currency fell as much as 0.4 percent against the U.S. dollar in early Asian trade to hit $0.6968, its weakest level since April 2009, before settling above $0.70.

"The Aussie's being singled out for punishment due to its heavy trade reliance on China," said Sean Callow, senior currency strategist at Westpac. "It's reflecting a gloomier outlook for China and commodity prices."

These concerns were compounded by Australia's weaker-than-expected gross domestic product (GDP) report that was released on Wednesday. The economy expanded a seasonally adjusted 2.0 percent on year in the April-June quarter missing expectations for growth of 2.2 percent.

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The Aussie has lost 14 percent of its value against the greenback this year - putting in the ranks of the worst performing major currencies in 2015. So far, its decline has been orderly. However, if the pace of losses begins to accelerate, that would set alarm bells ringing, said Callow.

"I think it's still around the sorts of levels you could argue are fair value," he said. "The next number people are thinking about is $0.65 - would that be justified by what's happening in China and the commodities market? I don't think so."

Read More RBA keeps key rate unchanged at 2% ahead of Q2 GDP

Calllow sees the currency trading in the $0.68-$0.70 range for the next couple of weeks. "While markets are so volatile, we can only take a short term view."

Emma Lawson, senior currency strategist at National Australia Bank says the currency's break below $0.70 was inevitable given uncertainty in the region and large swings in markets.

"It may take a bit of pressure to get it sustainably under $0.70," she said.

"Given the market is already very short - it's hard to get a lot of impetus to the downside in the very short term," Lawson added.

Monetary policy

Discussing the broader implications of the Aussie's fall, Callow says fresh weakness in the currency makes further rate cuts unlikely, says Callow.

The Reserve Bank of Australia (RBA) on Tuesday left the cash rate on hold at 2.0 percent, where it has been since May. It cemented its wait-and-see stance by repeating that it would assess upcoming economic data to judge the impact of past easings.

The RBA appeared comfortable with the level of the Australian dollar, reiterating that it is "adjusting to significant declines in key commodity prices."

"A weaker currency and stable interest rates is the sort of combination that the RBA would probably prefer," he said.



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