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The ‘Aussie’ most overvalued

The Australian dollar is the most overvalued currency in the world, according to HSBC.

Taking data from the OECD’s measure of purchasing parity, The Economist’s Big Mac Index and the Current Real Effective Exchange Rate, HSBC compared the currency to its five-year average, and found the Aussie dollar the most expensive, ahead of the Norwegian Krona and the Swiss Franc.

Using the OECD’s measure of purchasing power parity (what a mouthful!), the Australian dollar is overvalued by 60%, suggesting it should trade against the US dollar at around 60-70 US cents.

HSBC also found that Australia also has the least active policy makers in the so called ‘currency war’. That is where countries around the globe are devaluing their currencies, through economic stimulus, to help their local industries.

Manufacturers and exporters are hurt when currencies appreciate, as they receive less local currency for their export sales. The high Australian dollar has been blamed by several of our companies for lower earnings, including Cochlear Limited (ASX: COH), Ansell Limited (ASX: ANN) and CSL Limited (ASX: CSL).

The problem for Australia is that further stimulus is likely in countries including the US, Japan and China, our biggest trade partner. That could see the Australian dollar rise even higher.

Foolish takeaway

Foolish investors looking to take advantage of the high Australian dollar, could consider buying shares in international companies; or exchange trade funds (ETFs) that invest in companies outside Australia. Alternatively, Australian companies with large offshore earnings could be the go, such as James Hardie Industries (ASX: JHX). Should the Aussie fall, and all other things being relative, the value of your investments should rise.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King owns shares in Cochlear and CSL.

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