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Time to Buy the Australian Dollar ETF?

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So far in 2013, the story in the currency ETF world has been strength of the U.S. dollar. The greenback has surged against a variety of currencies to start the year and many investors think this trend can continue.

This is largely thanks to a huge level of weakness seen in the currency’s main competitors, the euro, the yen, and the British pound. All three are facing issues with their economies and appear poised to slump in Q2 as well (see Can Currency ETF Trends Continue?).

Yet while many developed market currencies have seen weakness in 2013, a few have managed to stay firm against the dollar. One such currency is definitely the Aussie dollar, as represented by the CurrencyShares Australian Dollar Trust (FXA - Free Report) .

The currency has still underperformed UUP to start the new year, but it is up since January 1st, adding about half a percent in the first three months of 2013. This is largely because of uncertainty in other developed markets, and the relatively high discount rate in the Aussie economy (also read Inside the Only Singapore Dollar ETF).

Currently, rates come in at 3%, a pretty healthy level when compared to what investors see in countries like the U.S. or Japan. This makes the Australian dollar a decent choice for a carry trade, while it also suggests that the RBA has a great deal of policy flexibility going forward, something that cannot be said for many other developed markets.

In addition, the currency is also becoming increasingly popular with central bankers around the globe, largely thanks to its insulation from many other weakened markets like Japan or Britain. This makes it a great diversifier in portfolios, and an increasingly important part of forex baskets.

If that wasn’t enough, there are also some new rumors of Australia and China setting up an agreement to make the Aussie dollar freely convertible to yuan. If approved, this would make the Australian dollar just the third currency—after the dollar and the yen—to achieve this status, a net positive for Australian businesses and the reputation of the nation’s currency alike (read The Key to International ETF Investing).

Technical perspective

Beyond the strong fundamentals underlying the currency, there are also a number of positives from a technical perspective as well. FXA cannot seem to break below its longer term moving averages, as the 15-day SMA remains above its longer term level.

This has been the trend for at least the past six months, and both times we were in danger of seeing a crossover, the currency rallied and then proceeded to surge to new heights. Given that we just witnessed a similar situation a few days ago, now could be a great time to get in on the Aussie dollar wave in hopes of another continued appreciation streak.

Bottom Line

FXA, and the Aussie economy, have some strong fundamentals at their back, and we look for these to continue for quite some time. That is why we currently have a Zacks ETF Rank of 2 or ‘Buy’ on FXA going forward (see Currency Hedged ETFs: Top International Picks?).

So, for investors seeking a currency play but are squeamish about making a long bet on the U.S. dollar, FXA could be a great alternative. It is highly ranked, has strong momentum, and its fundamentals suggest that the trend could continue for at least a bit longer.

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