Add Australia to list of development markets disappointments to start 2014.
Dating back to late 2011, the Reserve Bank of Australia pulled out plenty of rate-cutting stops to jolt the world’s 12-th largest economy. The result is Australia now has a benchmark interest rate of 2.5%, a record low.
RBA’s rate cuts have had the desired impact weakening the Australian dollar. Over the past three months, the CurrencyShares Australian Dollar Trust (NYSEArca: FXA) has tumbled 8.6%, but that has not done much to buoy the fortunes of the local economy or the iShares MSCI Australia ETF (NYSEArca: EWA). [Good News for Aussie Bears]
EWA has moved in near lockstep with FXA as the former has dipped 9% in the past three months, an ominous sign for an ETF an economy that should be benefiting from lower interest rates and a weaker currency.
Although materials stocks account for 19% of EWA’s weight, far below the 50.2% the ETF allocates to the financial services sector, Australia’s status as a major commodities producer has hampered its economy and EWA. For at least a year, RBA has said it wants to see more contributions to the Australian economy from non-mining sectors. That is not happening and EWA is down almost 2% since the start of the year. [Ominous Iron Ore Forecast Hampers Australia ETFs]
Although currency traders are betting RBA will lower rates again when it meets next month, a surprise jump in fourth-quarter inflation could take rate cuts off the table in the near-term.