Will FXA Follow FXI Down?

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Since the end of 2008, the CurrencyShares Australian Dollar ETF (NYSEArca:FXA), a long Aussie dollar bet relative to the greenback, has returned over 65 percent, making the Aussie dollar one of the world's best-performing currencies.

That's been music to investors' ears.

But with signs of Chinese economic fragility appearing and China's stock market reflecting the slowdown, isn't it high time for FXA to get with the program and start correcting downward?

A little background is in order.

Australia's resource-rich economy has benefited hugely from China's rapid expansion. It's pretty much next door to China, and it helps that iron ore, lead and coal-three of Australia's most abundant natural resources-also happen to be those in high demand in China.

This natural trading partnership has helped drive the price of the Australian dollar higher and buoyed the entire Australian economy.

Prior to the middle of last year, the Aussie dollar and Chinese stock market moved in virtual lock step with each other, as the chart below comparing FXA in pink and the iShares FTSE China 25 Index Fund (NYSEArca:FXI) in green clearly demonstrates.

FXA vs FXI

For investors worried about the knock-on effects of a Chinese slowdown on the Australian dollar, there are different options for protecting yourself.

The first, most obvious, choice is shorting FXA.

Another, less risky, option is simply clearing any Australian exposure out of your portfolio.

Finally, for those looking for a pairs trade, going long FXI and short FXA could work, should the gap in performance between FXA and FXI close.

Regardless of what you decide, you've been warned, so don't be left "spitting the dummy" should the high-flying FXA crash and burn.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: FXA , FXI

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