A spate of economic data highlighting the slowing Chinese economy as well as tumbling equity markets there have claimed an array of victims outside of the world’s second-largest economy, including the Australian dollar.
Even patient investors mulling exposure to Australia ETFs are faced with a conundrum: Australian stocks are expensive, at least according to Goldman Sachs. Not surprisingly, Goldman is less than enthusiastic about Australian commodities exporters, which are being crimped by slack demand and the strong U.S. dollar.
The CurrencyShares Australian Dollar Trust (NYSEArca: FXA), which tracks the Aussie against the U.S. dollar, has tumbled more than 13% this year and is one of the worst-performing developed market currency ETFs.
“Chinese demand for raw materials may not necessarily rebound as quickly as overall economic activity, which could be a problem for Australia. The recent devaluation of the Yuan has reduced the purchasing power of Chinese businesses and investors. The Caixin manufacturing Purchasing Managers Index fell to 47.0, lower than the forecast 47.5 reading. This is the worst showing for the index since the 2007-2008 financial crisis. Depending on the trade balance, this poor showing for the PMI could open the door for further devaluations of the Yuan by China and further weakening of demand for Australian natural resources. While the Federal Reserve maintained current interest rate levels, it is widely believed that it is a matter of time before the central bank begins to raise rates. The Reserve Bank of Australia, on the other hand, is forecast to lower the cash rate to 1.5% next year. The unemployment rate is expected to creep up to 6.5% by November, which could further pressure the Australian Dollar,” according to Options Express.
FXA and the Aussie also face an array of technical hurdles, issues that could be exacerbated by more RBA rate cuts.
“We see the December Australian Dollar heading toward the 0.6923 low from earlier this month. This could be seen as an important level in the near-term, as a lower close would continue the pattern of lower highs and lower lows. A rebound off this level could be viewed as positive near-term. On the upside, closing above the 0.7250 mark may be interpreted a reversal,” according to Options Express.
CurrencyShares Australian Dollar Trust
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.