With the Fed putting the breaks on cheap money, foreign currencies are depreciating against the U.S. dollar, with noticeable declines in historically stronger Australian and Canadian currency exchange traded funds over one year.
The CurrencyShares Australian Dollar Trust (NYSEArca: FXA) is now down 14.0% and CurrencyShares Canadian Dollar Trust (NYSEArca: FXC) is off 10.1% over the past year.
Countries like Australia and Canada “are rebalancing their economies by encouraging weaker currencies,” Sebastien Galy, an FX strategist for Societe Generale, said in a MarketWatch article.
One U.S. dollar is now trading around 1.11 Canadian dollars from 98 Canadian cents in 2012. [Tumbling Loonie Not Yet Benefiting Big Canada ETF]
Bank of Canada Governor Stephen S. Poloz reiterated his concerns on inflation, which is below target. Consequently, they are now more worried about deflation than inflation.
“Until today, the Bank of Canada had been careful not to openly talk down the loonie,” Chief economist Douglas Porter of BMO Capital Markets said. “They effectively gave sellers the green light.”
Meanwhile, one Australian dollar is now worth $0.875, hovering around a three-and-a-half year low, from $1.10 in July 2011. [Down Under Disappointment]
The Australian central bank has slashed rates by 225 basis points since late 2011 and hinted that the Australian dollar has more room to fall. FRB Governor Glenn Stevens has stated that “85 U.S. cents would be closer to the mark,” while a Reserve Bank board member pointed to 80 cents as “a fair deal for everyone.”
The Australian and Canadian currency have been considered two commodity currency plays as the countries have relied on heavy commodity exports. However, the recent global slowdown, notably in China, has reduced demand for raw materials. Consequently, the exporters are beginning to shift their economies away from commodities demand.
For more information on world currencies, visit our currency ETFs category.
Max Chen contributed to this article.