ETF UPDATE: US Dollar Gets Steamrolled By Central Banks
In the lead-up to the long July 4th holiday, the FX market is usually pretty quiet; this was not the case this week.
In an unprecedented development on Tuesday, officials from the ECB, Bank of England, Bank of Canada and the US FED delivered speeches that outlined higher domestic interest rates and removal of stimulus sooner than the market had expected.
Since the US FED is the only central bank currently with a tightening bias, the news that other G-7 rates could all rise in unison was negative for the Greenback.
The USD Index lost over 2% for the week including a 1.6% loss to the Aussie Dollar. The AUD/USD tested the March high of .7730 before falling back to .7680 at the New York close.
The Aussie also got a lift this week as former RBA board member John Edwards expressed his view that the RBA will likely initiate eight 25-basis point rate increases over 2018 and 2019. Considering the pressure this would put on the local mortgage market, we don’t agree with Mr Edwards’ forecast.
The central bank will meet next Tuesday and we expect RBA chief Phillip Lowe to walk back on those comments and maintain the stance that any strength in the AUD/USD is a headwind to domestic growth and exports.
In the bigger picture, it’s likely that the narrowing yield differentials between US and Aussie rates will continue to favor the USD over the AUD.
Investors looking to profit from a lower AUD/USD can look to buy the BetaShare ETF with the symbol: YANK.
YANK is an inverse ETF with a market weighting of 2.5%. This means that a 1% move in the AUD/USD will translate into a 2.5% move in the unit price of YANK.
With a current unit price of $13.85, we consider YANK to be a reasonable addition to client portfolios. We estimate that when the AUD/USD trades back to the January low of .7160, the unit price will be around the $16.50 level.
BetaShare ETF: YANK
