What’s Behind The Current Australian Dollar ETF Decline (AUD, EWA, UUP)

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March 25, 2012 11:59am NYSE:AUD NYSE:EWA

Jonathan Yates:  With strong exports and a central bank maintaining high interest rates, the Australian dollar has been a top performer in global currency markets – til now.

U.S. interest rates are doing the AUD ‘roos wrong.

But the twin blows of rising interest rates in the United States, coupled with slowing economic growth in China has seen the Aussie declining in value. The Pimco Australian Bond (NYSEARCA:AUD) is off for both the week and the month. The trend is not the friend of the AUD either, as it is trading beneath its 20-day and 50-day moving averages. At $22.88, the iShares MSCI Australian exchange traded fund (NYSEARCA:EWA) is far beneath its 52-week high of $28.85.

The Reserve Bank of Australia has maintained interest rates at over 4% in a world where other central bankers have theirs pegged at zero. This has made the Australian dollar a favorite for carry trade transactions, where debt denominated in currencies from countries with higher yields becomes more valuable. From this, the Aussie naturally rose in value.

Quantitative Easing II not only weakened the U.S. dollar (NYSEARCA:UUP), it helped to strengthen the Aussie. Over the term of Quantitative Easing II, from November 2010 to June 2011, the Australian dollar increased in value as the US dollar decreased.

However, since early March, when Federal Reserve Chairman Ben Bernanke announced that a third round of quantitative easing was not imminent, interest rates paid by US Treasury bonds and the UUP have increased. Over the same period, the AUD and EWA declined.

Written By Jonathan Yates From Emerging Money

Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the team of Emerging Money to bring you cutting edge global news and analysis.

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