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Is AUD/USD Risk On The Downside?

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Aug 09, 2017

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.

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Weekly ETF Monitor for week ending 28 July 2017

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Jul 28, 2017

The S&P/ASX 200 declined by 0.4% and the S&P 500 ended the week flat, while the EURO STOXX 50 gained 0.4% for the week. iShares Global Telecom ETF (IXP) was the top performing equity fund for the week. The US dollar continued to decline, with the Australian dollar gaining 0.9% to trade above US 80c for the first time in 25 months. The euro gained 0.8%, while the yen added 0.4%. Commodities posted a strong week with gold up 1.3%, silver up 0.8% and palladium gaining 2.7%. WTI Crude jumped 8.6% to approach the US$ 50/bbl mark. BetaShares Crude Oil Index ETF (OOO), BetaShares Commodities Basket ETF (QCB) and ETFS Physical Palladium (ETPMPD) were all amongst the top performing funds for the week. The Australian ETF market saw inflows of A$58m and outflows of A$14m from domestically domiciled ETFs last week.

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Weekly ETF Monitor for week ending 21 July 2017

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Jul 21, 2017

The S&P/ASX 200 declined by 0.7% as more hawkish statements from RBA saw the market dip on Tuesday. The S&P 500 gained 0.5%, also led by shifting rate expectations. The EURO STOXX 50 lost 2.1% for the week. BetaShares Global Gold Miners ETF (MNRS) was the top performing equity fund for the week as the market continued to turn positive for precious metals. The Australian dollar gained another 1.1% against the US dollar last week. The euro gained 1.7% and the yen also gained 1.2% as the US dollar fell on lower interest rate expectations and potential delays to Trump's policy agenda. Commodities posted a strong week with gold up 1.5% and silver jumping 4.6%. ETFS Physical Silver (ETPMAG) was the top performing fund for the week. Iron ore also rallied on higher than expected Chinese growth. The Australian ETF market saw inflows of A$196m and outflows of A$141m from domestically domiciled ETFs last week. The largest flows for the week were in the cash sector with inflows into BILL and QPON and outflows from AAA.

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Weekly ETF Monitor for week ending 14 July 2017

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Jul 14, 2017

Global equities rallied last week following Janet Yellen's comments suggesting that the pace of rate normalisation will be more gradual than some had anticipated. The S&P/ASX 200 added 1.1%, the S&P 500 rose 1.4%, the EURO STOXX 50 gained 1.8%, while the MSCI Emerging Markets Index jumped 4.5%. iShares MSCI BRIC ETF (IBK) was the top performing unleveraged equity ETF for the week, returning 2.3% in Australian dollar terms. The Australian dollar gained over 3% on general US dollar weakness and higher commodity prices. The euro gained 0.6% and the pound added 1.6% against the US dollar. The Japanese yen also strengthened by 1.2%. Global bonds yields climbed after a better-than-expected US jobs report offered support to the Federal Reserve's plan to raise interest rates, US 10 year Treasury yields up 0.08%. Australian 10 year government bond yields up 0.13%. Commodities rebounded with WTI crude oil up 5.2% and iron ore up 4.7%. Lower rate expectations also provided positive news for precious metals with gold rising by 1.2% for the week, its best weekly performance in two months. The Australian ETF market saw inflows of A$84m and outflows of A$67m from domestically domiciled ETFs last week.

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European monetary policy in the spotlight

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Jul 06, 2017

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.

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