The Reserve Bank of Australia surprised global financial markets in early February when it pared Australia’s benchmark interest rate by 25 basis points to a record low of 2.25%.
To its credit, the CurrencyShares Australian Dollar Trust (NYSEArca: FXA) was able to muster a modest February gain, but investors might do well to avoid big bets on the Aussie rallying against the U.S. dollar because RBA may not yet be done lowering interest rates.
“Australia has room for 9 quarter point cuts before zero is hit. But cuts won’t happen that way. Accompanied by some sort of shock-and-awe statement, I expect Australia to cut rates 100 basis points or more at some point,” writes Mike Shedlock of Mish’s Global Economic Trend Analysis.
While a 100-basis point cut at one meeting would be a stunning move by RBA, it is impossible to rule out more cuts from a central bank with a somewhat recent track record of doing just that.
RBA’s benchmark cash rate was 4.75% in October 2011. The central bank unveiled 25-basis point cuts at two consecutive meetings later that year. From November 2011 to August 2013, on its way to the 2.5% interest rate, RBA cut rates at eight of 20 meetings.
Now 2.25%, Australia’s benchmark interest rate is not even half the 6% level seen in October 2008 and not even a third of the 7.25% rate seen in March 2008. [Aussie ETFs Brace for More Rate Cuts]
With the RBA eying further downside for the Aussie, the ProShares UltraShort Australian Dollar (NYSEArca: CROC) merits consideration. CROC, which attempts to deliver twice the daily inverse performance of the AUD/USD pair, is down slightly this year.
There are reasons to consider the long CROC thesis.