The Australian dollar fell to a fresh five-and-a-half-year low overnight, dropping to just 77.20 US cents amidst heightened expectations of an interest rate cut when the Reserve Bank of Australia (RBA) meets next week.
International leads
While the European Central Bank recently launched an enormous economic stimulus plan, interest rates have been cut in Canada and Singapore while the Reserve Bank of New Zealand appears to be easing talk of future rate hikes. In Australia, the market is predicting as many as three interest rate cuts over the course of 2015 with the first expected to be made when the RBA meets next week for the first time in 2015.
Local needs
The local economy is suffering from crashing commodity prices, low consumer confidence, high rates of unemployment and low levels of inflation. Meanwhile, the Australian dollar remains above the RBA's target level of 75 US cents which could see the bank cut rates by as many as 25 basis points to a historical low of 2.25%. As reported by The Australian, traders are also eyeing off a second cut in July and a "substantial chance" of a third cut by the end of the year.
The strengthening US greenback is also adding to the downward pressure on the local currency. While the Federal Reserve has again reiterated that it will be "patient" with interest rate hikes, it still seems likely that it will raise rates while other nations are lowering theirs. As a result, investors are piling into the greenback, forcing international currencies lower.
Here's how to profit
While that's bad news for Australian tourists wanting to holiday overseas, there are numerous Australian companies that should benefit from the trend. Companies such as Westfield Corp Ltd (ASX: WFD), ResMed Inc. (CHESS) (ASX: RMD) and Amcor Limited (ASX: AMC) all generate a significant portion of their earnings in the United States. As their earnings are repatriated back to Australia, the lower exchange rate helps bolster their returns in Australian currency terms.
Investing in those sort of companies is one of the greatest ways investors can profit from a weaker Australian dollar. While the US economy is expected to continue strengthening over the coming years, the dollar should remain low for some time yet so now is a great time to position your portfolio accordingly.
Furthermore, you can also make fantastic profits by buying high-yield dividend stocks. As interest rates fall, investors will increasingly turn their back on the safety of term deposits in favour of superior dividend returns.
