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Buy these stocks to benefit from a falling Aussie dollar

After the Australian dollar flirted with buying US$1.10 after surging through parity, the recent trend has been down and despite a recent rally back towards US95 cents, the local currency now is buying just US91 cents.

While a weaker Australian dollar is unhelpful for travellers heading overseas and importers as it means less buying power, the weaker currency does benefit exporters as their products become more competitively priced (cheaper) for holders of US dollars to purchase. Another group of businesses that stand to gain from the weaker Australian dollar are companies with significant overseas operations earnings US dollars.

Within this group of currency-exposed businesses, some companies will benefit more significantly than others. Firms that have most of their cost base here in Australia but  earn their revenues in US dollars are more leveraged to the lower dollar. Likewise firms that are able to repatriate more of their overseas earnings back to Australia are also well leveraged, as they can take advantage of the weaker exchange rate as opposed to a company that must reinvest and fund in its overseas operations.

QBE Insurance (ASX: QBE) is one such firm that will benefit from a weaker exchange rate but will also have to significantly reinvest those profits overseas and must always hold significant reserves overseas for regulatory purposes, thus limiting the benefit.

Fortescue Metals Group (ASX: FMG) incurs nearly all of its costs in Western Australia, yet its iron ore is shipped off into international markets where it is sold in USD. This means the company is not just a highly leveraged play on iron ore price but also a play on the Australian dollar-US dollar exchange rate.

Bluescope Steel (ASX: BSL) is also highly leveraged to a weaker domestic currency as a weaker currency makes its steel products significantly more competitive overseas. The strong dollar was a major contributor to the company’s struggles over the past few years, which has seen its share price fall significantly. An improved balance sheet, significant restructuring and a more favourable exchange rate makes the company’s outlook significantly stronger.

At the smaller end of the market, firms such as SDI (ASX: SDI), Integrated Research (ASX: IRI) and Infomedia (ASX: IFM) also offer investors the opportunity to benefit from a weaker Australian dollar but without the significant uncertainty of commodity prices. The more predictable pricing of their products can make these niche businesses sensible ways to gain exposure to currency moves.

Foolish takeaway

While a foreign exchange currency tailwind can be a great benefit to companies, it is important that investors always consider the underlying fundamentals of a company. A poorly performing business is unlikely to become a great investment simply due to exchange rate movements alone, making careful analysis of a company’s prospects as important as ever.

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Motley Fool contributor Tim McArthur owns shares in QBE Insurance.

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