ETF Trends
ETF Trends

Export-dependent economies are supposed to benefit from weak currencies. That is conventional wisdom, it explains Japan’s ongoing efforts to weaken the yen and the problems that has caused for other export economies from Brazil to Germany to South Korea. One country that is not yet reaping the rewards of a suddenly weak currency is Australia.

Until recently, the Australian dollar had been the best-performing developed market currency against the U.S. since the global financial crisis. Since debuting almost seven years ago, the CurrencyShares Australian Dollar Trust (NYSEArca: FXA) is up more than 28%. However, remembering that the Aussie was once among the world’s most beloved currencies is tricky following a May decline of almost 6.7% for FXA. [ETF Spotlight: Currency ETFs]

Things got so bad for the Aussie last month that it fell below parity against the greenback and still resides below that mark. Today, it takes about 97 U.S. cents to buy one Aussie. As recently as early April, Americans traveling to Australia would have need more than $1.05 to buy just one Australian dollar. Then May rolled around.

The Reserve Bank of Australia pared interest rates to a record low of 2.75%. George Soros reportedly shorted the Aussie. Stanley Druckenmiller made bearish comments on the currency and forex traders favored the rising greenback over riskier currencies. None of those factors made a positive impact on the iShares MSCI Australia Index Fund (NYSEArca: EWA), the largest Australia ETF by assets. [Chart Of The Day: Australia ETF]

While the Aussie was tumbling last month, EWA was performing worse. Much worse. Last month, the $2.2 billion ETF plunged 11.6% amid concerns that slowing commodities demand will weigh on the world’s 12th-largest economy.

On Monday, EWA and FXA have found a way to trade higher even after China’s unofficial HSBC manufacturing PMI report fell to 49.2 in May from 50.4 in April. Add to that, the Australian Bureau of Statistics said that Australian retail sales rose 0.2% last month on a seasonally adjusted basis last month after falling 0.4% in April. Economists expected a May increase of 0.3%, according to

China is the largest export market for Australia and iron ore accounts for about 20% of Australian exports. Iron prices are declining, a scenario that RBA has noted multiple times this year as the central bank has said other sectors of the Australian economy need to start picking up the slack from materials because the country’s mining boom is expected to end in 2013.

With a 19.2% weight to the materials sector and BHP Billiton (NYSE: BHP), the world’s largest mining company, as its largest holding, EWA is vulnerable to any retrenchment in commodities prices. Further pressuring the Aussie, EWA and the ETF’s constituents is the currency’s status as a risky currency. That leads to Australian equities being viewed as somewhat riskier than other developed markets. Since Australian stocks and the dollar are viewed as “risk on” plays, that leaves both vulnerable to a possible end of quantitative easing by the Federal Reserve and that may explain why EWA is not benefiting from FXA’s downside.

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.