The Reserve Bank of Australia unexpectedly raised its main interest rate on Tuesday, becoming the first G-20 nation to do so since the start of the financial crisis. Australia, which managed to avoid a recession thanks to a quick fiscal stimulus and strong demand from China, was expected to be among the first developed markets to raise rates, but most analysts believed a move would come later this year.
Reserve Bank Governor Glenn Stevens indicated that Tuesday’s rate hike may be the first in a series. “The risk of serious economic contraction in Australia now having passed, the Board’s view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy,” said Stevens.
Now that Australia has blazed a trail, several Asian central banks are expected to follow suit. South Korea is widely expected to be the next to act, with Indonesia, Taiwan, India, and China expected to begin raising rates in early 2010, reports Alex Frangos.
Such a development would mark a sharp departure from previous patterns. Traditionally, Asian central banks have raised rates only after the U.S. Federal Reserve did so. But with the Fed expected to hold rates steady for another year, Asian economies are taking the lead in this economic recovery.
Australia ETFs On The Move
In addition to dozens of ETFs that offer partial exposure to Australian markets, there are multiple funds focusing exclusively on outback country. These ETFs saw major movements following the announcement of the rate hike:
- iShares MSCI Australia Index Fund (EWA): Unexpected interest rate hikes generally don’t set off equity market rallies. But these are far from ordinary times. Perhaps viewing the rate hike as an affirmation of the Australian economy’s overall strength, investors pushed EWA higher in Tuesday trading, with the ETF gaining nearly 2.5%.
- Rydex CurrencyShares Australian Dollar Trust (FXA): The Australian dollar, which had already gained 25% against the greenback this year, was surging even higher on Tuesday as investors attracted by the higher interest rate rushed in. The strengthening currency presents a dilemma for a country that fought off a recession largely through exports to China. If the Australian dollar appreciates too quickly, exports could become expensive, hampering the recovery.
Disclosure: No positions at time of writing.