Overseas central bank action in Asia could drive markets and exchange traded funds this week as the Reserve Bank of Australia, Bank of Japan and Bank of Korea meet.
On Tuesday, many anticipate the Australian central bank to cut its interest rates to help foster growth in response to the fall in commodities prices. Societe Generale expects the RBA to cut rates by 25-basis points, lowering the cash rate to a new all-time low of 2.0.%, reports See Kit Tang for CNBC.
The iShares MSCI Australia ETF (NYSEArca: EWA) is up 3.7% year-to-date. Meanwhile, the CurrencyShares Australian Dollar Trust (NYSEArca: FXA) is off 6.8% so far this year and could fall further if the central banks follows a looser monetary policy.
“The key consideration is that growth will remain sub-trend for a few quarters and key commodity prices will continue to slide, which makes a weaker exchange rate highly desirable from a policy perspective,” according to Societe Generale. “The prospect of a U.S. rate hike as early as June may also close the window of opportunity to ease policy elsewhere quite soon.”
On Wednesday, the BOJ will end its meeting. The Japanese economy expanded an annualized 2.2% in in the fourth quarter of 2014, compared to expectations of about a 3.7% gain, slowing in response to the higher tax rates imposed. Consequently, Moody’s Analytics argues that the slowdown provides the central bank enough room to maintain its loose monetary policies but require additional easing to hit its 2% inflation target.
Year-to-date, currency-hedged Japan ETFs have been among the best performers among developed markets, with the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) up 12.5%, iShares Currency Hedged MSCI Japan ETF (NYSEArca: HEWJ) up 12.6% and Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP) 12.4% higher. These hedged strategies may continue to outperform a non-hedged strategy if the Japanese central bank continues its loose monetary policy and drags down the yen currency. [A Good Year for Japan ETFs]