Tuesday's ETF to Watch: IQ Australia Small Cap ETF

Last week saw a flurry of data from the U.S. market that signaled to many that the country's economy was slowing down. Unemployment was up and manufacturing and sales were both lower, suggesting that the economy was being hit on all sides. Luckily, the U.S. market can take a breather this week thanks to a lack of key data reports as the focus shifts to international markets instead. A number of central banks will be meeting this week across the developed and emerging world with the ECB, the Bank of England, Bank of Brazil, the Reserve Bank of New Zealand as well as the Reserve Bank of Australia all giving their decision on rates over the next few days. Kicking things off from this important group is Australia which looks to give its decision on interest rates later today.

The Australian rate decision should be an interesting one as it could potentially signal the bank's policy for the rest of the year. The central bank has kept rates on hold since November of 2010 when it hiked the benchmark rate by 25 basis points up to 4.75%. Many are looking for another increase thanks to some comments by the RBA in May, but thanks to the recent GDP report -- which showed that the Aussie economy contracted by 1.2% in the most recent quarter -- most have delayed their estimates for the next hike until August [Highlighting Five Free ETF Tools].

With that being said, inflation remains an issue that must be dealt with by the bank in the near term as the rate of price increases is trending towards the top of the target rate, between 2%-3%. If U.S. dollar weakness continues, this trend could be further exacerbated by increasing commodity prices, potentially forcing the bank to act sooner rather than later, suggesting that a rate hike today isn't entirely out of the cards for today's meeting. "A rate rise is a low chance -- I wouldn't completely rule it out," said Besa Deda of St. George. "We saw the big contraction in GDP and that was driven by the short-term temporary factors of the natural disasters, but that is a tough backdrop to be raising rates in." [ETF Insider: Prudent Buying After Panic Selling]

Thanks to this key meeting, investors should look for the IQ Australia Small Cap ETF (NYSE: KROO  ) to remain in focus throughout today's trading session. The fund tracks the IQ Australia Small Cap Index which is a market cap-weighted index that seeks to provide investors with a means of tracking the overall performance of small cap Australian companies. The fund has struggled so far in 2011 and has lost 3.3% so far this year including a 3% slump in the past two weeks alone. This is largely thanks to the aftereffects from the bad weather earlier in the year as well as slumping commodity prices across the board. Nevertheless, the fund is up almost 43% over the past 52 week period and could return to such high levels of returns if the economy begins to pick up again soon. 

Should the central bank signals optimism despite the growing cloud of worry in many of the other developed markets, KROO could rise on the day and put the fund back on track to the gains it saw late last year. If, however, the central bank expects more weakness either as a result of the slowdown in Europe and the U.S., or as result from the natural disasters that impacted the country earlier in the year, look for this small-cap fund to tumble in Tuesday trading [Seven ETFs To Invest Like Peter Schiff].

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