Investors tuned into the foreign currency market have heard plenty this year about the dollar’s weakness, how “Brexit” could punish the British pound and about a solid rebound, sort of, for the euro. Flying somewhat under the radar has been the suddenly hot Australian dollar.
Thanks in large part to rebounding commodities prices and much to the charging of the Reserve Bank of Australia (RBA), the CurrencyShares Australian Dollar Trust (NYSEArca: FXA), which tracks the Aussie against the U.S. dollar, is up nearly 3% over the past month and more than 7% year-to-date. That after FXA posted a double-digit loss last year, making it one of the worst-performing developed markets currency exchange traded funds.
Like so many developed market central banks, the Reserve Bank of Australia (RBA) has been actively reducing borrowing costs in recent years. Australia’s benchmark lending rate is currently 2.25%. That is a record low for the world’s 12th-largest economy, but high by the standards of the rest of the developed world.
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.