The Australian dollar, and related exchange traded fund (ETF), may see the deleterious effects of a slowing economy and rising bad debts.

The Australian dollar, or “Aussie,” is forecast to fall 17% this year against the U.S. dollar and it is estimated that the Aussie will depreciate to 53 U.S. cents this year, writes Candice Zachariahs for Bloomberg. The weakening Aussie is a result of the Australian Reserve Bank cutting interest rates by 4% from September to February.

After a drop of 35% since hitting a 25-year high back in July, the Aussie may further depreciate as the country tackles its external debt that is around 89% of its GDP. It is thought that 34%, or $287 billion, of total external debt are in short-term loans.

In response to shrinking exports and increased pressure to further cut rates, the economy contracted 0.5% in the fourth quarter, a first in eight years. It is believed that the downward economic trend is likely to increase as a result of a long-reaching financial debacle.

Exports diminished by 5% with coal shipments down 19%. The trade surplus dropped to $624 million in January compared to earlier forecast of $704 million. It is predicted that there will be a $384 million deficit in 2009.

  • CurrencyShares Australian Dollar Trust (FXA): down 2.7% in the last month; down 1% in the last three months

ETF FXA performance

Read the disclaimer, as Tom Lydon is a board member of Rydex Funds.

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.