Overseas central bank action in Asia could drive markets and exchange traded funds this week as the Reserve Bank of Australia, Bank of Japan and Bank of Korea meet.
On Tuesday, many anticipate the Australian central bank to cut its interest rates to help foster growth in response to the fall in commodities prices. Societe Generale expects the RBA to cut rates by 25-basis points, lowering the cash rate to a new all-time low of 2.0.%, reports See Kit Tang for CNBC.
The iShares MSCI Australia ETF (EWA) is up 3.7% year-to-date. Meanwhile, the CurrencyShares Australian Dollar Trust (FXA) is off 6.8% so far this year and could fall further if the central banks follows a looser monetary policy.
“The key consideration is that growth will remain sub-trend for a few quarters and key commodity prices will continue to slide, which makes a weaker exchange rate highly desirable from a policy perspective,” according to Societe Generale. “The prospect of a U.S. rate hike as early as June may also close the window of opportunity to ease policy elsewhere quite soon.”
On Wednesday, the BOJ will end its meeting. The Japanese economy expanded an annualized 2.2% in in the fourth quarter of 2014, compared to expectations of about a 3.7% gain, slowing in response to the higher tax rates imposed. Consequently, Moody’s Analytics argues that the slowdown provides the central bank enough room to maintain its loose monetary policies but require additional easing to hit its 2% inflation target.
Year-to-date, currency-hedged Japan ETFs have been among the best performers among developed markets, with the WisdomTree Japan Hedged Equity Fund (DXJ) up 12.5%, iShares Currency Hedged MSCI Japan ETF (HEWJ) up 12.6% and Deutsche X-trackers MSCI Japan Hedged Equity ETF (DBJP) 12.4% higher. These hedged strategies may continue to outperform a non-hedged strategy if the Japanese central bank continues its loose monetary policy and drags down the yen currency. [A Good Year for Japan ETFs]
HSBC analysts believe that South Korea’s central bankers could lower growth and inflation projections Thursday, but the BOK may not necessarily further cut rates after last month’s surprise rate cut.
“The BOK lowered its policy rate to a record low of 1.75 percent in March. That will give BOK officials more time to monitor economic developments before easing further,” HSBC said.
Year-to-date, the currency hedged Deutsche X-trackers MSCI South Korea Hedged Equity ETF (DBKO) is up 2.5% and rival WisdomTree Korea Hedged Equity Fund (DXKW) is 5.2% higher. Meanwhile, the non-hedged iShares MSCI South Korea Capped ETF (EWY) rose 4.9% so far this year. [Muted Reaction to Rate Cut for South Korea Hedged ETFs]
For more information on the Asia Pacific, visit our Asia category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.