Investment Research

Is AUD/USD risk on the downside? ETFS S&P 500 High Yield Low Volatility ETF (ZYUS) Key Teakeaways: The AUD/USD exchange rate is currently close to 2 year highs, at just below US 80c. US rate expectations pulled back in July as political developments have cast uncertainty over the pace of US reforms and growth. Investors with a view that the USD is undervalued or the AUD is overvalued can play a reversal via ZUSD, which is the most cost effective way to access direct US dollar exposure with an ETF. A declining USD has been the key theme in foreign exchange markets this year. The AUD has gained more than 8% from its mid-May lows, while the US Dollar Index (DXY), a measure of the value of the USD against a collection of major world currencies, has dropped nearly 7% over the same period. As shown in Figure 1 the recent appreciation of the AUD has been particularly steep, with the currency peaking at US 80.66c in late July, while the DXY has been in a downward trend for most of 2017, falling over 10% from its peak in the final days of 2016. Chaotic administration weighing on the US dollar. With the Russia investigation, continual changes in key personnel and failures to negotiate Congress, the Trump administration is failing to meet the lofty expectations set by the market last November. Whilst the Fed is now considered likely to raise rates only once more this year, the US economy is generally in good health. US 10 year treasury yields have fallen by just over 10 basis points since the start of July, suggesting that the long-term monetary policy outlook is relatively unchanged. With temporary factors and uncertainty being the main drivers of the lower dollar, a swift reversal is a possible scenario if confidence is restored. Last Friday’s US employment numbers, which exceeded analyst expectations, were an example, with the DXY jumping 0.75% almost immediately. RBA talking AUD down. The strength of the AUD has in part been a result of a shift in the expected direction of the RBA’s next rate move. However, the RBA last week noted that the higher currency is a concern for growth and cut its estimates for 2017 GDP growth by 0.5%. Further validation of a slowdown could quickly shift AUD sentiment to a bearish stance. What does this mean for investors? Investors wishing to express a bullish USD/bearish AUD view may consider the ETFS Physical US Dollar ETF (ZUSD) . ZUSD offers exposure to an appreciation of the USD against the AUD with a management fee of 0.30% per annum, making it the most cost effective ETF offering this exposure in Australia.

European monetary policy in the spotlight ETFS EURO STOXX 50® ETF (ESTX) Key Takeaway: Despite Draghi’s hawkish statements, Europe’s economic indicators still point to a strong continuing recovery with levels over and above Australia, the US and the UK. In this week’s ETF Securities trade idea we look at key economic indicators released in June across the eurozone as well as looking ahead to the potential end of monetary stimulus, as hinted by the European Central Bank last week, and what that means. Manufacturing in the Eurozone - In June manufacturing in the eurozone continued to expand at pace, with Markit’s eurozone manufacturing PMI indicator of factory activity moving to its highest level since April 2011, pointing to a significant increase in GDP growth in Q2. Germany led the way, but even Greece showed signs of expansion during the month. Composite PMI, combining manufacturing and services, dipped, but remained strong, as shown in Figure 1. Eurozone GDP Growth for Q1 2017 was at 0.6% for the quarter, well above the levels seen in the UK at 0.2%, the US at 0.45% and Australia at 0.3%. In an annual basis, as shown in Figure 2, the eurozone had gained significant ground in recent years. Unemployment held firm at 9.3% in May. While the headline rate is still historically high, it has decreased by a full percentage point in just 15 months and is down from a peak of 12.1% less than four years ago, as shown in Figure 3. Inflation figures released at the end of last week disappointed and clouded the picture somewhat. Headline CPI fell back to 1.3% in June, having peaked at 2.0% in February, as shown in Figure 4. Core CPI, which exclude the volatile energy segment, rose to 1.1% providing some evidence for those looking to frame a reflationary argument. The end of monetary stimulus in the eurozone? Hawkish comments from ECB president, Mario Draghi, last week hinted at the end of monetary stimulus in the eurozone. Although the implications were later watered-down, the market’s reaction to the possibility of near-term tapering was reminiscent of the 2013 US taper tantrum; the euro leapt to a 16 month high, German 10 year Bund yields rose to an 18 month high and the EURO STOXX 50 dropped 2.9% for the week. Sustainability The episode has raised questions as to whether the region’s recovery is sustainable or a result of the extraordinary stimulus measures implemented over the past two years. Cautious statements that followed suggest that stimulus will remain in place for some time, which should be positive for equity markets. Alternatively, as shown in Figure 1, a rising-rate environment has also historically coincided with strong equity market performance over the longer-term. What does this mean for investors? Investors wishing to take a view and add Europe to their portfolio may consider using ETFS EURO STOXX 50® ETF (ESTX), the only ETF in Australia tracking Europe’s leading blue-chip index. ESTX offers unhedged exposure to the eurozone with a management fee of 0.35% per annum.

Palladium on the move? ETFS Physical Palladium (ETPMPD) In this week’s ETF Securities trade idea we examine the drivers behind palladium’s recent price run (up 30% YTD) and look at whether it has further to go. We identify four key points to consider: Palladium’s major use is in autocatalysts used in emission reduction equipment in gasoline cars and its main suppliers are South Africa and Russia Demand for gasoline vehicles is on the rise in key markets such as China and India and diesel demand is declining globally Electric vehicle demand is yet to reach sufficient scale to impact palladium prices significantly Speculative positioning in palladium is high, but not excessive Palladium is a metal used mainly in pollution abatement equipment. Approximately 80% of palladium is used in autocatalysts to reduce the emission of carbon dioxide and nitrogen oxides. There are higher loadings of palladium in gasoline cars than there are in diesel cars. Diesel cars have higher loadings of platinum (which performs a similar role to palladium, but its more suited to diesel engines which operate at lower temperatures). About 40% of platinum demand comes from autocatalysts. About 40% of mine supply of palladium comes from South Africa and another 40% comes from Russia. Historically, the Russian government had been selling its stockpiles of the metal, but there has not been any metal from this source since 2013. There is no transparent data on whether the Russian government has more stocks to sell. Palladium has appreciated by 30.0% in US dollar terms in 2017-to-date and, as shown in Figure 1, is approaching parity with platinum for the first time since 2002. Consumer preferences have tilted towards gasoline vehicles away from diesel, which accounts for much of the rise in demand for palladium relative to platinum. The automobile growth in markets like China, India and other emerging markets is a key area of strength. These are generally gasoline markets. These countries are also tightening emission standards which will increase the loading requirements of palladium. Established diesel markets like Europe are not seeing automobile growth on the same scale and regulatory fall-out from the emissions scandal and technological advancements have further tilted demand away from diesel. Electric vehicles (EVs) are growing rapidly from a small base. While electric vehicles account for less than 1% of global sales today, consensus estimates that it will rise to 4% by 2025. Most EVs do not contain palladium and so the growth of this type of vehicle will reduce a source of demand. We don’t think that the growth of EVs will materially change the supply-demand balance for palladium in the next couple of years, but will do as the market continues to grow. Speculative positioning in the futures market is elevated, as shown in Figure 2. Net longs are above their 5 year historic average but are still well below 2013-2014 levels when concerns about mine supply were aggravated by strikes in South Africa. Supply is subject to abrupt changes. Mine closures due to strike activity, embargoes of exports from certain countries and recycling dependency on other metals are some of the examples of factors that cause supply disruptions. While changes in demand can be quite surprising, as we have seen with the rotation toward palladium (gasoline engines) from platinum (diesel engines) in light of the emission scandal, generally changes in demand are more gradual. Investors wishing to add palladium exposure to their portfolios may consider using ETFS Physical Palladium (ASX Code: ETPMPD), the only ETP in Australia providing investors with physical exposure to the metal. ETPMPD offers holders a direct entitlement to palladium vaulted at HSBC in Switzerland with a management fee of 0.49% per annum.

Silver lining investment theme Trade idea – ETFS Physical Silver ETF (ETPMAG) Gold vs silver ratio – indicates that silver is undervalued o Has averaged 62.63 since 1980 (as of 24 May 2017) o Currently widened to 73.49 (as of 24 May 2017) o 1x standard deviation above the long term average (as of 22 May 2017) Positive economics - a combination of higher inflation, a weakening US dollar (in first half of 2017) and improving manufacturing growth is likely to see silver prices trading higher. Is silver trading below fair value? Historically the ratio difference between gold and silver has been an interesting investment indicator of market direction. The gold vs silver ratio graph below identifies a potential trading theme. The graph indicates that when the ratio falls below the historic average line it could show gold as being below fair value relative to silver. On the reverse, when the ratio trades above the historical ratio average, like it is now, silver could be trading below fair value relative to gold. Positive price movements The Global Manufacturing Purchasing Managers Index (“PMI”) is sitting at a current high of 54.4, previously unseen since March 2011. In our view, the high PMI may indicate a potential increase in manufacturing activity and therefore a further potential positive move for the silver price in 2017. However, it should be noted that if we saw a global slowdown in manufacturing or a hawkish view from the US FED, this could potentially have a negative impact on the current price of silver and impact the gold vs silver ratio trading theme. Increasing demand Silver has a wide and growing range of uses globally, which could help further stimulate demand and create a positive move in the silver price; examples of silver’s growing uses include printed circuit board manufacturing, healthcare and the production of solar panels. ETF Securities research team give silver a 2017 fair value level of US$21/oz – for further information visit the ETF Securities Research Blog.