In Review: Central Bank Impact on Asia-Pacific ETFs
If global central banks were teenagers, it would be fair to say these entities are quite vulnerable to peer pressure. Taking a page from a 1980s after-school special, it is not unreasonable to say central banks in the Asia-Pacific region this week succumbed to a line of thinking akin to "C'mon. All the cool kids are doing it."
"It" being cutting interest rates or, in the case of the Reserve Bank of New Zealand, intervening in the forex market. The impact of interest rate cuts usually takes a while to be seen in any economy, but the headlines affect stocks, bonds and ETFs immediately.
Unfortunately for some marquee Asia-Pacific ETFs, the rate cuts or speculation thereof has done little to boost the fortunes of these funds on a weekly basis.
iShares MSCI Australia Index Fund (NYSE: EWA)
The Reserve Bank of Australia announced a 25-basis point interest rate reduction earlier this week, which took the country's overnight cash rate to 2.75 percent, the lowest level in over five decades. That rate is, obviously, low by Australia's standards, but high compared to most of the developed world.
In addition to the rate cut headline, news that George Soros is short the Australian dollar and that Stanley Druckenmiller is also bearish on the currency have weighed on the Aussie. That should be good news for export-dependent Australia and EWA. Maybe it will be over time, but EWA looks poised to finish the week lower by 1.5 percent.
iShares MSCI South Korea Capped Index Fund (NYSE: EWY)
The Bank of Korea surprised markets on Thursday by lowering South Korea's seven-day repurchase rate to 2.5 percent from 2.75 percent. Unfortunately, for South Korea equity bulls and the country's exporters, the won needs to weaken much more against the yen than a 25-basis point rate cut will allow for.
Basically, the Bank of Korea looks like a Pop Warner team matching up against the Bank of Japan with BoJ playing the role of the Baltimore Ravens. EWY has traded lower since the rate cut news and will likely finish the week in the red.
Market Vectors Vietnam ETF (NYSE: VNM)
On Friday, the State Bank of Vietnam announced it will pare its refinancing rate to 7 percent from 8 percent and lower the discount rate to 5 percent from 6 percent. The cuts are the eighth since last year and come on the heels of an interest rate reduction in March, Bloomberg reported.
VNM is trading lower by almost 1.1 percent Friday, but the ETF is in position finish with a weekly gain. Additionally, the rate cuts indicate the State Bank feels comfortable with Vietnam's inflation situation and that could prove to be a positive catalyst for VNM in the coming months.
iShares MSCI New Zealand Capped Investable Market Index Fund (NYSE: ENZL)
Central bank interventions in the foreign currency market rarely produce the desired result over the long-term, but the Reserve Bank of New Zealand is forced to try due to the adverse impact the strong kiwi has had on the country's exporters.
Problem is New Zealand's interest rates are 2.5 percent, high by the standards of the developed world, and that makes the kiwi a prime carry-trade currency. Enthusiasm for the intervention news waned quickly and ENZL will likely finish the week with a small loss.
Interestingly, in the two days since the RBNZ news hit the wires, ENZL has gained about $7 million in assets. The ETF had $200.7 million the day before the announcement and $207.9 million at the start of trading Friday, according to iShares data.
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