With most market commentators forecasting the Australian dollar (AUD) to fall in value, Westpac Banking Corp (ASX: WBC) has broken the trend by suggesting that it is set to rise over the coming 12 months.
Westpac, which has developed a reputation as being one of the most accurate exchange rate forecasters, predicted that investors will continue to invest in Australian bonds despite expectations that the U.S. Federal Reserve will soon increase their interest rates. This would drive further gains in the Australian currency which Westpac expects will reach US90 cents in June and US92 cents by the end of 2015, as reported by Fairfax media.
It's likely that the solid dividends offered by some of Australia's highest-yielding companies will also continue to attract foreign investors, just as companies such as Commonwealth Bank of Australia (ASX: CBA) and Telstra Corporation Ltd (ASX: TLS) have done in recent years. Looking forward, other stocks like Woolworths Limited (ASX: WOW) or Insurance Australia Group Ltd (ASX: IAG) could be targeted, too.
However, the tumbling commodity prices also need to be taken into consideration. Iron ore has dropped roughly 48% this year to be trading around a five-year low, which is affecting Australia's terms of trade and impacting our overall growth prospects. This could certainly weigh against Westpac's forecasts and instead see the AUD drop considerably in price.
Who benefits?
In today's globalised world, the value of the Australian currency can be an incredibly important factor in how strong a company's financial performance is in any given year. Should Westpac's forecasts prove correct and the AUD increases to US92 cents, companies in the travel and retail sectors could be amongst the beneficiaries.
As an example, Flight Centre Travel Group Ltd (ASX: FLT) could benefit as more Australians book international trips to take advantage of a higher AUD, while companies like JB Hi-Fi Limited (ASX: JBH), which imports a lot of the goods that it sells, could recognise a lower cost of sales.
Who loses?
Australian exporters, who have cheered the AUD lower in recent months, will be the big losers if the currency does appreciate in price again. That is especially true for our miners, such as BHP Billiton Limited (ASX: BHP) and Fortescue Metals Group Limited (ASX: FMG), which will find an appreciating AUD particularly painful given that iron ore prices are rapidly falling at the same time.
