Aussie Dollar ETF Plunges as Reserve Bank Cuts Rates

In a bid to assuage deflation concerns, the Reserve Ban of Australia cut its official rate to a historic low Tuesday, triggering a sell-off in the Aussie dollar and potentially lifting currency-hedged country-specific exchange traded funds (ETFs).

The CurrencyShares Australian Dollar Trust (NYSEArca: FXA ) , which tracks the Aussie against the U.S. dollar, fell 2.0% Tuesday and dipped below its short-term, 50-day simple moving average. Meanwhile, the Australian dollar decreased 2.3% to $0.749.

The iShares MSCI Australia ETF (NYSEArca: EWA ) , the largest U.S.-listed Australia ETF, dropped 1.1% Tuesday.

The looser monetary policy could support the economy but weigh on the AUD. Consequently, investors may track the markets through currency-hedged ETFs that try to mitigate the negative effects of a weakening Aussie, including the iShares Currency Hedged MSCI Australia ETF (NYSEArca: HAUD) and Deutsche X-trackers MSCI Australia Hedged Equity ETF (NYSEArca: DBAU) .

The RBA cut its official cash rate by 25 basis points to a record low of 1.75%, reports Mark Mulligan for The Sydney Morning Herald .

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The rate cut may have been in response to a drop in core inflation to well below the central bank's 2% to 3% target band as a result of falling oil prices and aggressive retailer discounting.

"Inflation has been quite low for some time and recent data were unexpectedly low," RBA governor Glenn Stevens said in a statement. "While the quarterly data contain some temporary factors, these results, together with ongoing very subdued growth in labor costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast."

Looking ahead, most economists anticipate a second cut before the end of the year, with the June quarter inflation figure, which comes out in August, providing further guidance on the RBA's path.

"A failure today to address the shocking CPI numbers risked falling behind the curve and allowing that disinflationary force to build," Jamieson Coote Bonds' Charlie Jamieson told SMH. "We fully expect a follow-up cut over next three months; the RBA rarely tweaks interest rate policy in isolation, so expect more to come."

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CurrencyShares Australian Dollar Trust

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