Goldman Forecasts: Dark Clouds for Australia ETFs?

June 11th at 2:14am by Tom Lydon

Bad news has been piling up for Australia ETFs, both equity-based fare such as the iShares MSCI Australia Index Fund (NYSEArca: EWA) and currency funds such as the CurrencyShares Australian Dollar Trust (NYSEArca: FXA).

A combination of chatter regarding the end of quantitative easing by the Federal Reserve, weak commodities prices, slack Chinese economic data and Australia’s own disappointing data points have pressured ETFs tracking the country known as the land down under. In the past month, FXA has tumbled 5.5%, a performance that on its own is dismal, but one that looks stellar compared to the 13.2% slide over the same time for EWA. [Plunging Aussie Not Helping Equity ETFs]

Things got so bad for the Aussie last month that it fell below parity against the greenback and still resides below that mark. And things are rapidly getting worse for the embattled Australian currency. During Tuesday’s Asian session, AUD/USD briefly traded as low as 0.9382, meaning it took 93.8 U.S. cents to buy one Australian dollar. The dip below the 0.9400 level set off stop-loss orders, though the Aussie would bounce, but not by much. [This ETF is no CROC]

The catalyst behind the Aussie’s Tuesday’s woes in Asia, woes that could trickle over to the U.S. session for EWA and FXA, was easy to spot. Goldman Sachs slashed its 2013 and 2014 GDP growth forecasts for the world’s 12th-largest economy. Goldman Sachs, the largest Wall Street investment bank, said it believes Australia’s economy will grow 2% this year, well below the previous forecast of 2.4% growth, according to Investing.com.

Goldman said the Australian economy will grow 1.9% next year, 80 basis points below the bank’s original estimate of growth of 2.7%.

Regarding the Australian dollar, Goldman said it sees AUD/USD trading to 0.8500 within a year. That is down from the bank’s previous forecast of 0.9000 though Goldman has previously said an extreme scenario is AUD/USD at 0.8000, Investing.com reported.

Then the Australian Bureau of Statistics said that Australian home loans rose just 0.8% last month after rising 4.8%. Not only did the May reading miss estimates calling for a 2% increase, but the April number was revised lower from a 5.2% increase.

That could translate to further weakness for EWA as slumping real estate hits the ETF on two fronts: Its 50% weight to financials and an 18.5% allocation to materials names, which were already siege due to tepid Chinese data. EWA now resides more than 6% below its 200-day moving average, but investors willing to take a chance on a rebound will be compensated as the ETF had a 30-day SEC yield of nearly 3.7% as of April 30, according to iShares data.

iShares MSCI Australia Index Fund

 

 

ETF Trends editorial team contributed to this report.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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