Rebounding commodities prices are playing a significant part in the Australian dollar’s ascent this year, one that has boosted the CurrencyShares Australian Dollar Trust (NYSEArca: FXA), which tracks the Aussie against the U.S. dollar, by 5%.
However, FXA has pulled back in recent weeks as it and the Aussie encounter some critical longer-term resistance. 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.
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.[related_stories]
That pressured the Aussie, but the currency has come roaring back this year as the U.S. dollar has wilted. The Aussie’s rapid move higher means currency investors should approach AUD with caution in the near-term.
“Aussie Dollar (AUD/USD) strength has accompanied the latest rally in commodities. But it is facing a stiff test right now. As you can see, it is at dual resistance. A cluster of resistance is in play here and the AUD/USD may have made a reversal pattern, poking up through resistance and reversing below it – watch for a break of that support,” according to See It Market.
Equity ETFs are responding to the higher Aussie, meaning these funds could be vulnerable if the currency pulls back.
The SPDR MSCI Australia Quality Mix ETF (NYSEArca: QAUS) emphasizes the quality factor, which captures excess returns to stocks that are characterized by low debt, stable earnings growth and other ‘quality’ metrics. Lastly, the First Trust Australia AlphaDEX Fund (NYSEArca: FAUS) selects Australian companies based on growth factors including 3-, 6- and 12-month price appreciation, sales to price and one year sales growth, along with value factors including book value to price, cash flow to price and return on assets.
“What the Aussie Dollar does from here could well go a LONG way to determining if commodities like Crude Oil and Gold are topping out or ready to breakout,” adds See It Market.
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CurrencyShares Australian Dollar Trust