The CurrencyShares Australian Dollar Trust (NYSEArca: FXA) has fallen 11.3% year-to-date and that may not be the end of the fund’s downside as the Reserve Bank of Australia (RBA) looks to continue its accomodative policy stance in an effort to bolster Australia’s broader economy in the face of significant commodities and mining weakness.
The iShares MSCI Australia ETF (NYSEArca: EWA), the largest U.S.-listed Australia ETF, is lower by 12.3% this year, indicating Australian stocks are not responding favorably to ongoing weakness in 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. Australia’s still struggling equity market could be the impetus for RBA to keep pushing rates lower in an effort to weaken the Aussie.
“Australia’s central bank Governor Glenn Stevens said accommodative monetary policy is likely to be appropriate ‘for some time yet,’ while adding the macroeconomic impact of recent mortgage rate increases by major banks ‘may not be large,’” reports Michael Heath for Bloomberg.
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%, 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.
“In China, Australia’s biggest trading partner, anxiety has heightened over its economic outlook following a stock market slump and a surprise yuan devaluation in August that roiled global markets,” according to Bloomberg.
iShares MSCI Australia ETF
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.