Reading in the news that Deutsche Bank thinks the Aussie dollar could down as low as $0.65c to the US$ within the next two years, my investor mind thought who wins and who loses if that happens? The forecast came with some qualifiers that the RBA holds interest rates to where they are until 2016, and then the US raises its rates and the US dollar strengthens against other major currencies.
Within the past 15 years it has gone down to $0.65 in two periods – once in 2003 and during the depths of the GFC around 2008-2009. I remember that last one pretty well because my niece was going on an overseas trip and she lost about 31% of her purchasing power from 2007. Those experiences are good for investors though. It gets you to think of how to take advantage of the situation and get on the winning side.
As my readers may already know, a weakening dollar benefits exporters and companies that have earnings denominated in foreign currency, preferably in US dollars for this scenario. Each cent difference could become millions in extra earnings, so a 25 cent move from $0.90 to $0.65 means company earnings will be boosted when overseas income is translated back into Aussie dollars.
Retailers such as Harvey Norman Limited (ASX: HVN), JB Hi-Fi Limited (ASX: JBH) and Super Retail Group (ASX: SUL) have been enjoying a relatively high A$ to buy imports with more purchasing power, thereby creating better profit spreads for themselves. They may experience some earnings compression if the currency goes lower.
But we want to concentrate on the winners right now and they will be the exporters and businesses operating overseas such as in the US.
ResMed Inc (ASX: RMD), the developer of medical equipment for respiratory disorders, had 56% of its revenue come from Latin and North America and only 2.3% from Australia, so they would be one to watch if the currency falls.
Integrated grain handler Graincorp Limited (ASX: GNC), would have a more competitive relative price for its grain products overseas, where about 56% of its revenue comes from. It may also become more attractive to foreign buyers.
One of the reasons that Deutsche Bank thought the A$ would weaken is if China's economy slows down, the Aussie will weaken because it is a proxy currency for the Chinese yuan and mining exports from Australia will fall.
In this case many of the miners would still be winners if the Aussie weakens because many commodities are denominated in US$, so in one way sales may take a hit, but the currency exchange adds back in the conversion. So BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO), which have overseas operations, will get paid in foreign currency and domestic exports will be aided by advantageous currency conversions.
Foolish takeaway
Remember when you see news reports like this, they may not always come to be, but a good investor will always be thinking who wins and who loses if this happens? Seek out those advantages for yourself and profit from them.
