Aussie Dollar Sinks US Investor Returns

March 26, 2012

The Aussie dollar’s weakness trashed U.S. investors’ returns last week, but ‘no worries.’

The Australian dollar’s slide against the greenback last week pulled returns for U.S. investors into the red compared with flat returns for local Aussie investors, as a number of so-called commodity currencies took a technical breather and weakened against the U.S. dollar for the first time in a while.

U.S. investors in the $2.70 billion iShares MSCI Australia Index Fund (NYSEArca: EWA) lost 1.77 percent last week, while the locally denominated MSCI Australia Index was about steady for the week ended March 23, meaning all the red ink was about the currency cross, as IndexUniverse’s weekly Currency Impact report shows.

No commodity-related headlines were behind the shifts—they were more of a technical consolidation in an overall bearish trend for the U.S. dollar. Still, U.S. investors in ETFs such as the WisdomTree Dreyfus Commodity Currency Fund (NYSEArca: CCX) lost over 1 percent last week, again providing a clear example of just how much currencies affect returns in globalized investment markets.

Despite last week’s mediocre performances by the Aussie dollar and other commodity currencies from countries such as Norway, Russia and New Zealand, it’s hardly time for a change of heart among investors who have been bullish on countries with economies that rely on raw-material exports.

Indeed, the Aussie dollar has benefited greatly from the carry trade—wherein investors borrow in low-yielding yen and buy up assets in higher-yielding Aussie dollars in an effort to profit from the difference in yield.

However, the carry trade was on hiatus last week, as the yen appreciated by 2.5 percent against the Aussie dollar.

The weaker Aussie dollar means that when U.S. investors in Australian equities convert their gains in Aussie-dollar-denominated equities back into U.S. dollars, returns are hurt.

Other Currency News

The euro’s gains last week were like wind at the back of U.S investors in Europe, as the debt-plagued currency appreciated slightly.

Unfortunately, Spain is now occupying the spotlight once reserved for Greece, as Italian Prime Minister Mario Monti warned that Spain could “reignite the European debt crisis.”

The comment comes as European officials prepare a “debt crisis firewall”— which Germany currently insists should be capped at 500 billion euros.

Investors in the iShares MSCI Spain Index Fund (NYSEArca: EWP) are currently gaining from recent boosts in the euro, but might do well to watch their exposure in the Iberian country in coming weeks.

Complete coverage of the impact of foreign currency movements on U.S. investor returns is available in the IndexUniverse Currency Impact report.



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