German global banking giant Deutsche Bank sparked a flurry of media interest recently when it forecast a sharp fall in the Australian dollar down to US68 cents by the end of 2015. This would correspond to a 28% fall from the current exchange rate of nearly US93 cents and could have a huge impact on Australian listed companies.
How realistic is the forecast?
Honestly? No one knows. The average forecast of the various economists around the world is for the Australian dollar to fall to around US88 cents by the end of 2014 and US85 cents by the end of 2015.
The economists are surprisingly (or unsurprisingly depending on your viewpoint) divided on their outlook for the dollar. For the end of 2014, the highest forecast is for US97 cents, while the lowest is US69 cents. For the end of 2015, the highest forecast is again for US97 cents, while the lowest is Deutsche’s US68 cent forecast.
Should investors be worried?
A fall to US68 cents would impact a huge range of Australian-listed companies. Retail stocks such as JB Hi-Fi Limited (ASX: JBH), Harvey Norman Limited (ASX: HVN) and Super Retail Group Limited (ASX: SUL) will see more customer demand as overseas/online purchases become more expensive, however this is expected to be largely outweighed by margin contraction due to the higher cost of imported goods for sale.
Companies with sales in US dollars stand to benefit from increased revenue and profit in Australian dollar terms (assuming manufacturing occurs outside Australia). Key companies in this category include ResMed Inc. (CHESS) (ASX: RMD), CSL Limited (ASX: CSL) and Amcor Limited (ASX: AMC), while mining stocks such as BHP Billiton Limited (ASX: BHP) and Fortescue Metals Group Limited (ASX: FMG) stand to benefit from higher prices for iron ore in Australian dollar terms.
Guessing the way that foreign exchange markets move has proven to be a mug’s game. The estimates are found by assuming demand characteristics based on a huge range of factors including interest rates, inflation, productivity, export ratios and more. The wide range of estimates indicates that, at best, there is more downside risk than upside risk to the Australian dollar. Companies placed to perform well in these conditions are those that generate sales in US dollars and are not net importers to Australia.