Aussie Dollar ETF Goes From Star to Laggard

Once upon a time, things were good for the Australian dollar.

While considered to be a minor reserve currency, Australia's 21 years without a recession, AAA credit rating and high interest rates relative to much of the developed world stoked investor and central bank inflows to the Australian dollar. It even looked like the Aussie would be the ideal currency with which to profit from the global currency wars.

Times change and they have changed rapidly for the Aussie and the CurrencyShares Australian Dollar Trust (NYSE:FXA). Until recently, the Australian dollar had been the top-performing developed market currency against the greenback since the global financial crisis.

The recent ills of the CurrencyShares Australian Dollar Trust paint a starkly different picture. That may not be good news for fans of riskier assets. As one of the so-called riskier currencies, the Aussie is often used as a gauge of global risk appetite and prolonged weakness in this dollar could be a negative sign of those hoping for a true risk on rally.

For a while, AUD/USD trading back to parity was almost unthinkable. Forget parity. At the close of U.S. markets Wednesday, it took less than 96.5 cents to buy one Australian dollar. The past month has been particularly rocky for the Australian currency.

In that time, it was reported that George Soros was short the Aussie. Another hedge fund legend, Stanley Druckenmiller, sounded a bearish tone on the currency, too. Two weeks ago, Goldman Sachs said AUD/USD is vulnerable to a possible decline to 0.8000. Last week, Goldman's Hong Kong office said in a note overnight that its top trade recommendation was to be short the Australian dollar versus the Norwegian Krone, the Australian reported.

The same article in the Australian cited one broker that said a spate of hedge funds have or are preparing to short the Aussie and the report added: "Goldman last week cut its cut its 12-month forecast for the Aussie to US90c, down from US98c, on bets that capital flows into the currency would slow. Yesterday, UBS and AMP Capital also lowered their forecasts, while Credit Suisse said the Aussie would fall to US92c in three months and US85c in 12 months."

How Bad Is Bad? With the rash of headwinds the Aussie has endured, it is not surprising FXA is off almost seven percent in the past month, a stunning move for a developed market currency in that amount of time. To put FXA's woes into context, the equivalent British pound, euro and yen ETFs have all performed better than FXA in the past 30 days and that is not saying much. Not when the U.K. barely avoided a third recession and Japan is doing everything it can to weaken the yen.

Even amid turbulent oil prices, the CurrencyShares Canadian Dollar Trust (NYSE:FXC) has outperformed FXA in the past month. A weak GDP report has not kept the newly minted CurrencyShares Singapore Dollar Trust (NYSE:FXSG) from being better than FXA.

Throw in the Chinese Renminbi, Swiss Franc and Swedish Krona ETFs and FXA has been the worst-performing CurrencyShares ETF in the past month.

Tread Carefully Investors that think the Aussie dollar represents a value proposition should consider a few things. First, with the country's mining boom expected to end this year, the interest rate cut cycle there may not yet be complete.

Second, the Aussie has lagged some volatile emerging markets in recent weeks. For example, the WisdomTree Brazilian Real Fund (NYSE:BZF) and the WisdomTree Indian Rupee Fund (NYSE:ICN), though both down since late April, have at least been less bad than FXA.

If the Aussie continues to sell off and violates long term support at 0.9000, that will be another sell signal, though there are a few buy signals at the moment.

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