Australia Markets open in 3 hrs 35 mins

$A drops after RBA announcement

The Australian dollar is a third of a US cent lower after the central bank kept the cash rate at three per cent and made some upbeat comments about the economic outlook.

At 1700 AEDT on Tuesday, the local unit was trading at 104.06 US cents, down from 104.37 cents on Monday.

In a statement accompanying the rates decision, Reserve Bank of Australia (RBA) governor Glenn Stevens said the global outlook was better after the US avoided the fiscal cliff and Chinese growth was stronger.

However, currency markets focused on Mr Stevens' comments that low inflation rates would give the RBA scope to cut the cash rate further, if need be, and that the mining boom would soon peak.

After the RBA announcement the Australian dollar fell to an intraday low of 103.93 US cents.

Easy Forex currency dealer Tony Darvall said there was very heavy selling of the Australian dollar after the RBA's statement.

"It's like the market was ready to sell," he said.

"We're looking at a situation that the RBA statement is undermining the Australian dollar."

Mr Darvall said the local currency was already under pressure before the announcement because of European political concerns.

Spanish Prime Minister Mariano Rajoy may have to resign because of a corruption scandal and former Italian prime minister Silvio Berlusconi is showing solid gains in polls ahead of national elections later in February.

"Those political worries have cut short the big rally we saw in equity markets," Mr Darvall said.

"If it was to go on for another two days, we would be in for a larger correction in equities markets."

Mr Darvall said the fall in global stock markets and sentiment about Europe would most likely be the main drivers for the Australian dollar in coming days.

At 1700 AEDT, the Australian dollar was at 96.12 Japanese yen, down from Monday's close of 96.70 yen, and at 77.17 euro cents, up from 76.59 euro cents.

Meanwhile, the Australian bond market is stronger.

At 1630 AEDT on Tuesday, the March 10-year bond futures contract was trading at 96.530 (implying a yield of 3.470 per cent), up from 96.435 (3.565 per cent) on Monday.

The March three-year bond futures contract was at 97.150 (2.850 per cent), up from 97.050 (2.950 per cent).

Westpac senior market strategist Damien McColough said local bond futures prices began to rally when the local session started, based on renewed concerns about political instability in Europe.

He said Tuesday's RBA announcement also helped to support the early rally.

"They kind of remained positive after the (RBA decision)," Mr McColough said.

"That allowed the bonds to sustain the kind of rallies that we saw at the beginning of the day."