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If PIMCO is Right, Aussie ETFs Merit Attention


There is not much more that can be thrown at the CurrencyShares Australian Dollar Trust (FXA) . Over the past two years, the Reserve Bank of Australia has slashed interest rates by 225 basis points to a record low of 2.5%. While 2.5% is high by the standards of the U.S., Eurozone or Japan, that is paltry by Australia’s historical high-yielding standards.

With the world’s 12th-largest economy struggling to generate robust economic activity outside of the sagging mining sector, RBA may be forced to pare rates again. At least that is the view of PIMCO, the world’s largest bond manager, in note published Wednesday.

“Over the past 12 years, mining investment as a share of GDP has risen sixfold to nearly 7%, but recent data suggest that this balance sheet is tapering, with the sector detracting from real growth in the first half of 2013. To encourage a new balance sheet to step forward, the Reserve Bank of Australia (RBA) will have to keep interest rates low for an extended period, in our view, and likely lower them further to help smooth the transition away from mining-assisted growth over the cyclical horizon,” wrote Adam Bowe and Robert Mead.

The Aussie slid earlier this year as the currency became a favorite short trade for financiers including George Soros. At one point, only the yen was a worse-performing developed market currency than the the Australian dollar. [Aussie Dollar ETFs Offer Near-Term Upside]

FXA has rallied from $88.50 in early September to Tuesday’s close around $94.40, but if PIMCO is correct, FXA could be in for more downside. [Politics Pressure Aussie Dollar ETF]

What RBA wants to see is non-mining businesses contribute to Australia. The reality is those businesses are doing just the opposite. Regarding non-mining growth, Bowe and Mead wrote: “Unfortunately, we have yet to see this process take place, with real growth in non-mining business investment actually contracting over the year to June 2013.”

That does not necessarily mean Australia is headed for recession, something it has mostly avoided for over two decades, but lack of non-mining economic contributions means RBA has to keep its hands on the rate-cutting knife. And that could be good news for the ProShares UltraShort Australian Dollar (CROC) , the double-leveraged inverse equivalent of the AUD/USD pair.

ProShares UltraShort Australian Dollar

ETF Trends editorial team contributed to this post.

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.