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By Stella Qiu
SYDNEY (Reuters) - The Australian dollar dived to five-year lows on Monday, slammed by fears that a tit-for-tat global trade war would send the global economy into a recession, which had some traders bet on outsized rate cuts Down Under.
The kiwi is in focus this week, with the Reserve Bank of New Zealand due to meet on Wednesday against the backdrop of heightened global uncertainties. Swaps imply there is a 22% probability that the RBNZ can cut by 50 basis points for a fourth straight time.
Similarly for the Reserve Bank of Australia, markets see a 20% chance that the central bank could even deliver a big 50 bp rate cut in May, having just held steady last week.
The Aussie is battling to stay above 60 cents, having plunged to a five-year low of $0.5933 earlier in the day. Combined with a 4.5% tumble on Friday, it is headed for the biggest two-day decline since early 2020, with support scant until the pandemic low of $0.5510.
"In terms of the outlook for the Aussie, it is bleak, it's dire and it could get worse from here unless things are walked back," said Tony Sycamore, analyst at IG.
"I mean there is no good option for the Aussie dollar if we're going into a full blown trade war globally, and in particular with the frontline being tensions between China and the U.S.," Sycamore added.
China is Australia's largest trading partner and has countered U.S. tariffs with its own duties on U.S. goods.
Asian stocks plunged on Monday.
Chinese mainland stocks tumbled 4%, while Hang Seng index plunged 8.5%. The Chinese yuan - for which the Aussie is often sold as a liquid proxy - traded at the weakest level in two months.
The kiwi dollar fared a little better, and was last down 0.3% to $0.5577. It tumbled 3.4% on Friday, with support now at the February low of $0.5515.
The RBNZ will be the first central bank to react to U.S. President Donald Trump's reciprocal tariffs on the rest of the world. The central bank has already cut the cash rate by 175 basis points since August last year and has guided markets that the next move on Wednesday will be a smaller 25 bps.
"We expect the RBNZ to acknowledge these global risks," said Jarrod Kerr, chief economist at Kiwibank, who is still sticking to the view of a 25 bp rate cut on Wednesday.
"An escalation of the tariff trade war, should more countries retaliate, could stall our expected economic recovery. And such a scenario would require the RBNZ to push the cash rate below 3%."
In bonds, Australia's three-year government bond yields tumbled 11 basis points on Monday to 3.311%, the lowest since May 2023. It is set to post the biggest three-day drop since 2011.
New Zealand two-year bond yields fell 10 bps to 3.253%, the lowest since August 2022.
(Editing by Himani Sarkar)
