Investors without knowledge of the long-term historical average Australian dollar (AUD) – US dollar (USD) exchange rate could be forgiven for thinking the parity level is "normal".
In fact, parity – where A$1 buys one US$1 is far from "normal". Rather, since the AUD was floated in the early 80's the average exchange rate has been roughly A$1 buying US75 cents.
So while the domestic currency has certainly weakened recently, it still has quite a way to go if it is to revert to its long-term average.
Just as a strong AUD is good for some companies and bad for others, a weaker currency is also good for some and not for others.
With the AUD potentially set to fall further, it could be best for investors to avoid stocks that are harmed by a falling domestic currency.
Here are three that could be negatively affected by a weak AUD.
JB Hi-Fi Limited (ASX: JBH) – as an importer and retailer of electronic goods, JB Hi-Fi is ultimately exposed to the declining purchasing power of the AUD against USD-denominated goods such as televisions and tablets.
Qantas Airways Limited (ASX: QAN) – the airline faces a double-whammy from a declining currency. As it becomes more expensive to travel overseas, Australians either defer travel or refocus on domestic holiday destinations dampening the demand for Qantas' services. At the same time, Qantas purchases aviation fuel in USD, with fuel being an enormous expense for the airline a declining AUD eats into the airline's profit margin as it can be difficult to pass this expense onto customers.
Premier Investments Limited (ASX: PMV) – as a major apparel manufacturer and retailer, Premier is exposed to the offshore cost base of its manufacturing facilities. The group is also exposed to the cotton price which is traded in USD – the group's hedging policy will be an important factor in this regard, but even then hedging will only provide shelter for so long.
If you think there could be further falls in store for the AUD then it is worth considering what effects this will have on the companies you hold in your portfolio. The above three businesses will find the going increasingly tough the lower the AUD goes, however, they are far from the only companies facing a potential exchange rate headwind.
