Investors should be at least a little concerned by recent weakness in an exchange traded fund pegged to the Australian dollar since the currency has been a fairly reliable leading indicator for U.S. stocks.
CurrencyShares Australian Dollar Trust (NYSEArca: FXA) is down over 3% the past month. The ETF is designed to track the movement of the Australian dollar versus the U.S. greenback.
The currency ETF has been a solid performer since the worst of the credit crunch passed in 2009, on a weaker U.S. dollar.
“The Australian dollar has strengthened significantly due to strong commodity exports to Asia as well as fiscal and monetary stimulus measures of the U.S. government,” says Morningstar analyst Michael Rawson.
Traders watch the Australian dollar as indicator for how comfortable global investors are with taking on risk. FXA also offers a decent yield of nearly 4%.
However, the currency ETF is sensitive to commodities and tends to sell off when investors worry about growth in emerging markets. Some say the currency is correlated to emerging market equities and can be used as a barometer for demand in that area of the globe. [Why the Australian Dollar ETF is a Proxy for Risk]
The Australian dollar ETF has been trading lower after China cut its economic growth forecast and on reports the country’s steel production is slowing. [China ETFs Fall on Growth Concerns]
Over the past 10 months, every time the Australian dollar broke support, it resulted in at least a 7% decline for the S&P 500, according to Kimble Charting Solutions.
CurrencyShares Australian Dollar Trust
