Over the past several years, few global central banks have been as voracious when it comes to lowering interest as the Reserve Bank of Australia (RBA).
Investors should be mindful of the Australian dollar and the CurrencyShares Australian Dollar Trust (NYSEArca: FXA), which tracks the Aussie against the U.S. dollar.
Although the Aussie and FXA have recently traded higher, some currency market observers see weak anemic Australian economic data weighing on the country’s currency. FXA could be increasingly vulnerable as the monetary policies of the Fed and the Reserve Bank of Australia continue diverging. RBA recently cut Australia’s benchmark interest rates to a record low.
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.
Related: Aussie Dollar ETF Plunges as Reserve Bank Cuts Rates
Looking ahead, most economists anticipate a second cut before the end of the year, with the June quarter inflation figure, which comes out in August, providing further guidance on the RBA’s path. Investors looking to take advantage of Aussie weakness can consider the double-leveraged ProShares UltraShort Australian Dollar (NYSEArca: CROC).
Some market observers believe RBA can cut rates again.
“Franklin Templeton is betting the Reserve Bank of Australia will cut its cash rate two more times, reining in bond yields that have surged more than any other top-rated sovereign market over the past two months,” reports Bloomberg.
[related_stories]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. Although EWA is not a currency hedged ETF, one of the reasons it might be moving higher is the RBA’s loose monetary policy.
The looser monetary policy could support the economy but weigh on the AUD. Consequently, investors may track the markets through currency-hedged ETFs that try to mitigate the negative effects of a weakening Aussie, including the iShares Currency Hedged MSCI Australia ETF (NYSEArca: HAUD) and Deutsche X-trackers MSCI Australia Hedged Equity ETF (NYSEArca: DBAU).
Related: Aussie Dollar ETF Under Pressure
“A rally in commodity prices has also boosted the outlook for the country and Australia’s 10-year bond yield has climbed by more than half a percentage point since the end of August. That’s double the increase in comparable U.S. yields, which have been climbing on signals the Federal Reserve is likely to increase its benchmark next month,” according to Bloomberg.
iShares MSCI Australia ETF
