By Wayne Cole
SYDNEY, May 21 (Reuters) - The Australian dollar slid on Tuesday after the country's top central banker said interest rates might be cut as soon as next month, leading investors to wager an imminent easing was all but a done deal.
The Aussie dollar AUD=D3 dropped off to $0.6883, from around $0.6910, and threatened to re-test the recent 19-week low of $0.6865. The last time the currency spent any length of time at these depths was in early 2016.
The retreat came after Reserve Bank of Australia (RBA) Governor Philip Lowe said the policy board would consider a rate cut at the next meeting on June 4, an unusually blunt statement for the often circumspect central banker. argued that the Australian economy could sustain lower unemployment without generating inflationary pressures and noted that this is unlikely to happen under current policy settings," said Marcel Thieliant, senior Australia economist at Capital Economics.
"We think the RBA will cut interest rates to 1.25% in June and follow up with another cut in August."
Futures 0#YIB: jumped to imply around an 88% probability of a quarter-point cut in the 1.5% cash rate in June RBAWATCH , from less than 60% at the start of the week. A further move to 1% is baked in by December.
Rates have been on hold since mid-2016 but disappointing data on economic growth, inflation and unemployment has recently built a case for more stimulus.
Yields on three-year bonds AU3YT=RR are well under the cash rate at 1.21%, having hit all-time lows last week.
Bond futures rallied back toward record highs, with the three-year bond contract YTTc1 up 2.5 ticks at 98.800 after jumping from an early 98.730 low. The 10-year contract YTCc1 firmed 2 ticks to 98.3350.
The pullback in the Aussie wiped out all the gains made on Monday after Australian Prime Minister Scott Morrison's centre-right Liberal-National coalition pulled off a shock election win, beating the centre-left Labor Party. also eradicated a brief early rally made when Australia's banking regulator proposed a major relaxation in rules on mortgage lending, essentially allowing would-be home buyers to borrow more and the banks to oblige. shift could boost mortgage demand after months of weakness and may help retard a long fall in house prices.
Answering audience questions on Tuesday, Lowe noted that the move on lending rules would be complementary to any cut in rates as a support for the housing market.
Across the Tasman, the New Zealand dollar NZD=D3 was caught in the downdraft from the Aussie and slipped to a seven-month trough of $0.6511.
The Reserve Bank of New Zealand (RBNZ) cut its rates earlier this month but analysts suspect an easing by the RBA would renew pressure for even lower rates.
Yields on two-year bonds NZ2YT=RR were hovering just above all-time lows at 1.40%. (Editing by Sam Holmes)