The CurrencyShares Australian Dollar Trust (NYSEArca: FXA) is down 3.3% in the past month, meaning the Australian dollar has declined over that time as well. That did not stop the International Monetary Fund from reiterating its view that the currency is overvalued.
Although FXA has tumbled 11% this year, the IMF encouraged the Reserve Bank of Australia to keep its easy monetary policy in place because the Aussie, according to the lending agency, is overvalued by 10%. RBA has slashed interest rates by 225 basis to a record low of 2.5% since late 2011. [Aussie Dollar ETF’s Ascent may not be Over]
“With growth currently on the soft side, the real exchange rate still overvalued and weighing on the non-mining sector, and inflation within the target range, monetary policy should remain accommodative,” Malcolm Scott reported for Bloomberg, citing an IMF statement.
As recently as last month, the path of least resistance for the Aussie appeared higher as the currency’s run higher forced heavy short-covering, making the double-leveraged ProShares Ultra Australian Dollar (NYSEArca: GDAY) an appealing trade. RBA would oblige GDAY bulls by not raising interest rates and recent swaps data indicate another rate cut is not likely in the next few months. [Interesting Views on the Aussie Dollar ETF]
With Australia’s mining sector slowing and few if any other sectors contributing to economic growth in the world’s 12th-largest economy, RBA’s hands may be forced and another rate cut or cuts may be necessary to stimulate growth.