Alright a couple of a caveats here. First, the Guggenheim CurrencyShares Australian (NYSE: FXA) has, until recent weeks, been one of the better-performing developed market currency exchange-traded funds this year.
Second, it is not wise to turn leveraged ETFs, vehicles meant to be short-term trades, into long-term investments. With those points of emphasis out of the way, the ProShares UltraShort Australian Dollar (ProShares Trust II (NYSE: CROC)) has potential to be a star among currency ETFs over the next year.
No CROCodile Tears Here
Actually, CROC is already shining. With FXA down nearly 7.3 percent over the past month, CROC is more than doing its job with a 15 percent gain over that period. FXA tracks the Aussie's movements against the U.S. dollar, while CROC attempts to deliver twice the daily inverse returns of the Australian dollar against its U.S. rival.
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What makes CROC an alluring play among currency ETFs is that, although Australian interest rates are low by the country's standards, they are high relative to other major developed markets, such as the United States, the UK, Japan and the eurozone. Additionally, the Reserve Bank of Australia (RBA) has been on a scorched earth campaign over the past several years to weaken the Aussie in an effort to stimulate economic activity outside of the mining sector.
Australia's benchmark cash rate is currently a record low of 1.75 percent. During the global financial crisis, rates there were as high as six percent. RBA actually defied developed markets central banks “conventional wisdom” by raising rates in 2010 and 2011, but since the latter stages of 2011, Australian borrowing costs have been in a steady downward trajectory.
That trajectory shows few signs of abating.
Citing Macquarie, Rareview Macro founder Neil Azous said in a note out Thursday “RBA will likely cut interest rate by 25 bps in August to 1.5 percent, and then seen pausing before delivering two more cuts in the first half of 2017. Whether the RBA will go below 1 percent (3 cuts) depends on timing of Fed rate increases — don’t think Fed goes more than 50 bps per year. Sees AUD/USD troughing around 0.65.”
Although its interest rates and dollar have steadily been declining, Australia retains its AAA credit rating. At least in the eyes of Fitch Ratings, which recently reaffirmed Australia, the world's 12th-largest economy at AAA.
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