Tapering, Pre-Election Fears Could Pressure Aussie Dollar ETFs

The CurrencyShares Australian Dollar Trust (NYSE:FXA), the ETF proxy for the Australian dollar, has shown itself to be sensitive to chatter about Federal Reserve Tapering of quantitative easing.

Since May 20, about the time tapering talk really started, FXA is off nearly seven percent.

That does not include the more than one percent FXA has lost Wednesday. Nor does it include the fact that the ETF traded near its lows of the day immediately after the release of minutes from the Fed's most recent monetary policy meeting. While it is fair to say the outlook regarding tapering by Fed members is "mixed," it is also apparent bond-buying will at least be slowed (tapered) by the end of this year. That is one catalyst that could weigh on higher beta currencies, such as the Australian dollar.

The Aussie has gone from star to laggard in a hurry. Until its recent decline, the Aussie was the best-performing developed market currency against the U.S. dollar since the end of the developed market crisis. Attracted to interest rates that are higher than much of the developed world's and Australia's pristine AAA credit rating, global investors, including central banks, snatched up the Aussie in droves.

Related: Aussie Dollar ETF Goes From Star To Laggard.

Over the past couple of weeks, the Aussie, and thereby FXA, has regained some strength against the greenback, but that does not change the triple whammy faced by the currency. That is the Reserve Bank of Australia's insistence that despite record low interest rates of 2.5 percent, the currency is still overvalued, the end of Australia's mining boom and the fact that the Aussie is still among the most heavily shorted developed market currencies.

All of that has been good news for the unheralded ProShares UltraShort Australian Dollar (NYSE:CROC). CROC stands as valid avenue for investors looking to profit from Aussie downside without having to go directly into the currency market.

Not only that, but in addition to the Fed catalyst, there is another domestic catalyst looming that could trigger additional Aussie downside (upside for CROC).

Australia holds national elections early next month and some market observers are predicting a post-election decline for the Aussie. "If the Coalition wins this election, as seems likely, it might have to deal with a similar decline in the currency as it did in 1996. On the day of the 1996 election, the dollar was 76.1 US cents. Five years later, on April 2, 2001, it bottomed at 47.78 US cents, according to Australia's ABC News.

Importantly, the Alan Kohler, the author of that commentary, said it is not out of the realm of possibility the Aussie could fall to 80 cents against the U.S. dollar. The pair currently trades at 0.9017, but that is above many of the year-end forecasts for the pair from major global banks, many of which range from 85 to 88 cents.

Some even see AUD/USD falling below 85 cents next year. A fall to 80 cents could take a while, but with Fed tapering and Australian elections looming, seeing AUD/USD trade below 90 cents again is a real possibility and one that bodes well for CROC.

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Disclosure: Author is long CROC.

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