Australian Stocks Threatened by Strong Currency and a Weak China

NEW YORK ( TheStreet) -- Australia's economic growth reversed a downward spiral late last year, leading iShares MSCI Australia Index ( EWA) to trend higher in 2014, but a stronger exchange-rate and weakness in China could jeopardize further growth. 

The Reserve Bank of Australia said in the minutes for its July meeting on Tuesday that "the exchange rate remained high by historical standards, particularly given the declines in key commodity prices, and was therefore offering less assistance than it otherwise might in achieving balanced growth in the economy."

A stronger Aussie dollar could cause the prices of the country's resource exports to become overly expensive, leading consumers, such as manufacturers in China, to either cut down or substitute investment expenditure elsewhere.

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The run-up in value for the CurrencyShares Australian Dollar Trust (FXA) has taken place over the last year as the central banks of major currencies such as PowerShares DB US Dollar Index Bullish (UUP), CurrencyShares Euro Trust (FXE) and CurrencyShares Japanese Yen Trust (FXY) remain committed to record low benchmark rates, as well as committing to some form of stimulus measure.

This has made the relative attractiveness of the Australian currency greater, even as they too have actively cut rates since 2011.

At this point, policymakers at the RBA do not see the threat of a stronger currency completely dismantling economic growth, and have therefore kept interest rates steady at 2.5%.

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