Finally, even the Australian central bank has jumped on the bandwagon of monetary easing. Over the last one month, the investing world has seen several nations slashing key interest rates due to weakening global fundamentals, disinflationary threats and the commodity market slump (read: Global Policy Easing Puts These ETFs in Focus).

Now, the Reserve Bank of Australia (RBA) has joined the club. On February 2, the RBA cut its overnight cash rate by 25 bps to a record low 2.25%. The last rate cut that this economy had seen was in August 2013. 

The Australian economy which has enjoyed steady growth over two decades has lately been witnessing a slump. Commodity abundance was the one of major driving forces of Australia – especially the base metals and energy products – that assisted the nation to dodge recession during the global financial meltdown.

However, a slowdown in China – a major importer of Australian natural resources, falling prices of iron ore – Australia’s largest export, strength in the greenback that hurt overall commodity investing, and especially plunging oil prices and faltering consumer confidence thanks to government spending cuts affected the nation’s growth which is reportedly advancing in a ‘below-trend pace’ (read: 3 Commodity Country ETFs to Watch on U.S. Dollar Strength).

The consumer price index for 2014 saw the lowest increase in many years and the unemployment picture worsened over the past year touching the 11-year high in November 2014. Added to this, Australia needed to devalue its currency given the huge focus on iron-ore exports. But a volley of rate cuts in various nations in the last one month gave the Australian dollar unwanted strength and compelled the RBA to take resort to a step which can give a boost to its economy.

Market Impact

Aussie companies are known for high dividend payouts. Now with RBA hinting at ‘another cut this year’, dividend investing will surely regain its sheen which in turn will push up Aussie equities. Following the announcement, Aussie stocks skyrocketed to seven-year highs while its currency slipped to a six-year low and bond yields saw record plunges.
No doubt the latest rate cut will provide a good boost to investors’ sentiments over Aussie equities investing. As a result, the Australian equity ETF – iShares MSCI Australia ETF (EWA) – is poised to surge in the coming days on this surprise rate cut while its currency ETF – CurrencyShares Australian Dollar Trust ETF (FXA) – will take a dive.

Let’s take a closer look at the two.

EWA in Focus

EWA tracks the MSCI Australia Index which provides exposure to large and mid-sized Australian companies. The fund is heavily skewed towards its top 10 holdings which account for almost 60% of its total assets. Commonwealth Bank of Australia (11.94%), Westpac Banking Corp (8.87%) and BHP Billiton Ltd. (8.1%) take the top three spots with roughly 30% allocation.

EWA has an impressive 4.97% yield. The fund has a tilt towards the Financials sector (45%) followed by Basic Materials (13.3%) and Consumer Staples (8.3%). The fund is flat so far this year and is shaping up for a smart stretch of gains in the coming trading sessions. The fund added about 2.1% on February 2.

FXA in Focus

The Australian Dollar ETF tracks the movement of the AUD relative to the USD. The fund looks to generate returns through bank interest and any capital appreciation that may occur on account of AUD appreciating versus the USD. The fund charges 40 bps in fees. So far this year, FXA has lost around 4.5% and is poised for more losses post RBA action (read: Is Aussie Dollar ETF in Trouble?).  

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