Financial markets are increasingly pricing in the chance of a U.S. Fed rate hike this March with some estimates now putting the probability of a hike as high as 80%. I think it's fair to say that this cash rate hike is not currently fully priced in by currency markets and if the Fed does act the Australian dollar could take a mini-tumble versus the greenback.
Moreover, the Australian dollar and the nation's terms of trade are also being supported by resurgent commodity prices that seem more likely than not to ease off over the course of 2017. It's quite possible then that the local currency will once again retreat to levels seen through much of 2016, where it bought just US 71 -74 cents, which would be a big boost to ASX companies that earn a lot of their revenues and profits in North America.
Some good quality companies to benefit from a potential rise in the U.S. dollar include Amcor Limited (ASX: AMC) and Magellan Financial Group Ltd (ASX: MFG), while others like QBE Insurance Group Ltd (ASX: QBE) and Computershare Limited (ASX: CPU) are also expected to enjoy the benefits of a stronger U.S. dollar.
However, in my opinion San Francisco-based healthcare and sleep treatment specialist ResMed Inc. (CHESS) (ASX: RMD) offers the best option to investors looking to get exposure to U.S. dollar strength.
ResMed's primary listing is on the NYSE, although ASX investors can buy chess depositary instruments (CDIs) in the company that represent a 1/10th ownership interest in each U.S. share.
In effect the ASX-listed CDIs track the value of the NYSE scrip on a currency-adjusted basis. Currently the NYSE scrip sells for US$72.95 and the ASX-listed CDIs for $9.49. However, if the Australian dollar were to plunge tomorrow and only buy US 72.95 cents the CDIs would be worth $10.
ASX investors in ResMed CDIs then are gaining synthetic exposure to a stronger U.S. dollar and given it has weakened substantially against the Australian dollar recently now may be a good time to buy ResMed CDIs.
If U.S. markets hold up in 2017 I would not be surprised to see ResMed scrip sail over $10 in 2017 and this remains a company with bulletproof revenue growth, market-leading products and potential to expand its profit margins over time.
The stock is not conventionally cheap at current valuations, but overall it remains a good addition to a balanced portfolio in my opinion and I expect it will deliver good total returns for today's buyers.
