The Aussie dollar is teetering on the edge, under pressure on two fronts. It could be on its way down to around US69 cents by the end of this year, according to a Morgan Stanley forecast. It did slip briefly to US75.95 cents on Monday from weakening economic data from China, our biggest economic trade partner for exports.
When iron ore and coal were hot commodities, a tick up for the Chinese economy boosted the Aussie, Now, it’s the same relationship on the way down. If that wasn’t enough, the continuing talk of the US Fed raising interest rates also keeps the Aussie down. When the Fed starts tightening, international currency traders and investors will move to buy US financial instruments. They’ll sell Aussies for greenbacks.
Further RBA rate cuts will make the Aussie less attractive as well. A hot housing market is tempering the central bank’s decision to reduce its cash target rate, yet the rest of the economy needs lower rates to support growth in retail trade and private services.
The Aussie doesn’t have many options out at this point, but fortunately ASX investors do. Australian exporters and companies operating abroad benefit the most from a falling dollar.
I would be following companies like Cochlear Limited (ASX: COH) and CSL Limited (ASX: CSL). These healthcare sector leaders have the advantage of being defensive stocks, while at the same they are expanding business in large healthcare markets like the US. Cochlear is forecast for strong earnings growth thanks to a number of new hearing aid and cochlear implant products that came onto the market in 2014. Likewise, CSL has developed and acquired new production facilities to keep up with the high demand for its blood-related medical supplies.
They’ll book the majority of their operating earnings overseas in relatively stronger US dollars and euros. On top of regular earnings growth, net profits should get a boost when converted into Aussie dollars. Both are expected to raise earnings in the double digits over the next several years.
With strong-performing stocks like these, it wouldn’t be strange if some investors cheered on the Aussie to fall even more. Foolish investors don’t get mired down in the market’s gloom. They look for angles to get ahead because if one side seems to be losing, another side is gaining. Follow the winners.
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As of 2.11.2020
Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned.
We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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