USD strength looks here to stay | BetaShares Insights

USD strength looks here to stay

BY betashares | 4 March 2020
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On 28 February, the Australian dollar fell below US$0.65, its lowest point since the GFC. As the chart below shows, the AUD remains in a short and long-term downtrend against the USD that currently shows no signs of abating.

AUD vs. USD: 5 March 2018 to 4 March 2020

AUD vs. USD: 5 March 2018 to 4 March 2020

Source: www.xe.com. Past performance is not indicative of future performance.

There are several reasons why AUD weakness against the USD may continue, including:

  1. The U.S. economy continues to perform strongly, and U.S. interest rates remain high, compared to other developed markets. These two factors are currently combining to attract investment into USD-denominated assets.
  2. The Coronavirus has the potential to significantly damage both Chinese and global growth. The AUD would likely be a casualty of this, given our currency’s sensitivity to the Chinese economy and commodity prices. The U.S. at this point is seen as far removed from the epicentre of the Coronavirus (and global growth headwinds), and so the USD is looking attractive to investors in search of a “safe haven”.
  3. The RBA cut the cash rate again yesterday, to a record low of 0.5% p.a. While there is little room remaining for further cuts, the bank may be forced to cut once more this year, given the potential impact of the Coronavirus on the Australian economy, and the fact that the unemployment rate has ticked up to 5.3% p.a., and is moving further away from the RBA’s neutral rate estimate of 4.5% p.a. Falling interest rates typically lead to currency weakness.
  4. Technical indicators, both long and short term, are bearish. In the chart below, the green line indicates long-term technical support, while the grey line indicates short-term support. The AUD has broken below both lines, which is regarded by technical traders as a bearish signal. With the AUD looking vulnerable, lows that were last seen during the GFC could be tested.

AUDUSD 28 Feb 2020 performance

Source: Bloomberg. As at 28 February 2020. Past performance is not an indication of future performance.

How can investors trade a view that the AUD/USD will continue to fall?

BetaShares has two funds that could be used to express a positive view on the USD against the AUD (negative view on the AUD vs. the USD). Both are bought and sold on the ASX in AUD, just like buying shares, avoiding the costs and complexities of FX trading platforms, CFDs and foreign currency bank accounts.

BetaShares U.S. Dollar ETF (ASX: USD)

USD is designed to track the performance of the U.S. dollar against the Australian dollar.

Key Facts:

  • The Fund is designed to increase in value 1 for 1 in percentage terms with an increase in the USD against the AUD (before fees). Conversely, the Fund will fall in value if the USD declines against the AUD.
  • Provides access to institutional FX rates for retail investors
  • Backed by U.S. dollars held in custodial accounts with JP Morgan Chase, RBC, and Mitsubishi UFJ
  • Distributes any interest earned on the USD holdings annually

 

BetaShares Strong US Dollar Fund (hedge fund) (ASX: YANK)

YANK is designed to provide geared exposure to a change in value of the U.S. dollar against the Australian dollar. It’s important to note that geared exposure means the potential for magnified gains, but also the risk of magnified losses.

Key Facts:

  • Exposure is gained by selling AUD/USD futures contracts
  • A 1% increase in the value of USD vs. AUD on a given day can generally be expected to result in a 2-2.75% increase in the value of YANK before fees (and vice versa)
  • Provides access to institutional FX rates for retail investors
  • No possibility of margin calls for investors
  • You can’t lose more than your initial investment

Note: Gearing in YANK magnifies gains and losses and may not be a suitable strategy for all investors. Investors should be willing to accept higher levels of volatility and potentially large moves (both up and down) in the value of their investment. YANK does not track a published benchmark.

This  information is general in nature and readers should form their own views about the outlook for currency markets.

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