Up 11.6% year-to-date, the iShares MSCI Australia ETF (NYSEArca: EWA) is one of this year’s best-performing non-leveraged, single-country exchange traded funds tracking a developed market. The largest Australia ETF trading in the U.S. is higher by 1.7% over the past month and some traders believe EWA can deliver more upside.
Although EWA is not a currency hedged ETF, one of the reasons it might be moving higher is the Reserve Bank of Australia’s (RBA) consistently loose monetary policy. RBA recently cut Australia’s benchmark interest rates to a record low. However, EWA, which is not a currency hedged ETF, has performed well in the face of RBA rate cuts.
Australia’s benchmark interest rate of 1.75 percent is a record low for the country, but well above most other developed markets, indicating there is room for further downside. Importantly, some market observers view Australian stocks as attractively valued, a bonus when considering the world’s 12th-largest economy has not seen a recession in a quarter century.
Related: Aussie Dollar ETF Plunges as Reserve Bank Cuts Rates
Although conventional wisdom has recently dictated RBA would hold off on further rate cuts, Australia’s surprising dip in employment could encourage the central bank to again lower borrowing costs.
On a technical basis, EWA is nearing an important juncture.
“From a chart perspective, EWA has traced out a clear bullish inverse Head and Shoulders pattern since early August. Indeed, it had to endure a rather intense sell-off for a few weeks during late summer, but its comeback has been equally as forceful. Thus, the ETF is now back to testing that same resistance level (near 21). EWA failed to puncture this zone a handful of times in August and then again in October,” according to Instinet’s Frank Cappelleri in a note posted by Teresa Rivas of Barron’s.
[related_stories]Although RBA has not been shy about cutting interest rates, the CurrencyShares Australian Dollar Trust (NYSEArca: FXA), which tracks the Aussie against the U.S. dollar has been a decent performer among currency ETFs this year, but that could swiftly change if the Federal Reserve moves to hike rates or RBA does the opposite.
“Getting through that point would create a target near 23.00. It would also help EWA finally puncture a two year downtrend line, seen below on the monthly five year chart. Even with all of that, it would still be below its highs from 2014, thus, an eventual breakout is a necessary step to eventually getting back up there,” according to the Instinet note posted in Barron’s.
iShares MSCI Australia ETF (NYSEArca: EWA)
