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Australian Dollar ETF Falls on Rate Cut

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In Australia, investors have seen tame inflation, lower credit demand, and soft economic growth over the past few months. Still, the Australian dollar has remained firm, hurting exports across the board.

If that wasn’t enough we also saw weaker retail sales in the country along with brewing concerns over a housing bubble in the nation. In an attempt to alleviate the economy from these worries, the Reserve Bank of Australia slashed interest rates by 25 bps to a record low of 2.75%.

This is the first time that the interest rates have breached the 3% level in the country, and it comes as somewhat of a surprise as most were expecting no change from the central bank. As a result the rate cut has pushed down the Aussie dollar, as represented by the CurrencyShares Australian Dollar Trust ETF (FXA - Free Report) by roughly 0.7% (read: What's Next for Currency ETFs?).  

Aussie Economy Outlook

Australia has enjoyed more than 20 years of continuous growth, though at a slower pace in recent years. The economy maintains a favorable balance of trade, strong per capita income (one of the highest in the world), low unemployment, low budget deficit and high levels of economic freedom.

The country has always been a commodity powerhouse and major exporter of commodities – base metals, coal and agricultural products. As a result, the falling commodity prices have gone a long way in hurting the Australian economy.

Also, adding to its woes is the generic slowdown and continuous decrease in industrial production in the world’s second largest economy and one of its largest trading partners — China.

Further, the country has been deeply lacking in one area, which is oil. However, a recent massive shale oil discovery could dramatically alter this scenario going forward (read: Australia ETFs to Play the Coming Shale Boom).

Australian Dollar ETF in Focus

The Australian Dollar ETF tracks the relative movement of the AUD relative to the USD. The funds in this product are denominated in AUD and kept in a bank account, and the interest thus received is used to pay for the expenses and fees of the fund.

The fund looks to generate returns through the bank interest and any capital appreciation that may occur on account of AUD appreciating versus the USD.

The ETF has amassed $551.6 million in its asset base since its introduction in June 2006 and yields a decent 1.71% in annual dividends. FXA has lost 1.56% in the year-to-date time frame though, with more short-term losses possibly after the slide (read: Time to Buy the Australian Dollar ETF?).

Still, we believe the longer term outlook is relatively bright for this ETF as we currently have a Zacks ETF Rank of 2 or ‘Buy’ on FXA going forward. The product remains one of the best options for investing in the space, charging just 40 bps in fees and possessing a relatively high average trading volume as well.

So for investors who believe in the Aussie economy’s resilience now might be an interesting time to consider FXA. The product has been beaten down over the past few weeks, but it could rise back up soon as carry trade investors seek the haven that is the Aussie dollar, especially when compared to the yen.

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