The Reserve Bank of Australia surprised global markets Tuesday when it lowered Australia’s benchmark interest rate by 25 basis points to a record low of 2.25%.
RBA’s decision has predictably affected the Australian, a currency that RBA Governor Glenn Stevens maintains is overvalued relative to its U.S. counterpart. The Aussie has rebounded from its lowest post-RBA announcement levels and currently resides around 0.7758 against the U.S. dollar.
With Stevens saying Tuesday he’d like to see AUD/USD drop to 75 cents, financial markets are pricing in more RBA rate cuts, which will affect the CurrencyShares Australian Dollar Trust (NYSEArca: FXA) and the ProShares UltraShort Australian Dollar (NYSEArca: CROC). FXA is down 2.5% since Monday. CROC, which attempts to deliver twice the daily inverse performance of the AUD/USD pair, is up more than 4% over that time and hit an all-time high yesterday. [Big Day for Australia ETFs]
Overall, currency ETFs represent just a sliver of the over $2 trillion in assets parked in U.S. ETFs. Leveraged currency ETFs garner even less attention, but for risk-tolerant traders, CROC is worthy of consideration because signs point to more rate cuts from RBA.
“The interbank market is pricing in a ~67% chance of a back-to-back interest rate cut from the Reserve Bank of Australia (RBA). Despite this week’s ‘unexpected’ rate cut, it is easy to argue that the overwhelming consensus in the professional community is for a further weakening in Australia’s terms of trade and, as a result of that, the Australian Dollar (AUD) will have to trade much lower,” said Rareview Macro founder Neil Azous in a note out Wednesday.