The exchange rate between the US and Australian dollar, like any commodity, is a matter of supply and demand. When the demand for Australian dollars from people with US dollars increases, the exchange rate increases, while it falls when the opposite is true.
Interest Rates
What we saw in early April was a rapid spike in the USD to AUD exchange rate from 76 cents to 77 cents following the RBA's decision to keep interest rates on hold. The reason for the jump is that Australia's interest rates, while at an all-time low, are still attractive to international investors.
In Australia we recently saw ten-year bond yields fall below 2.3%, an incredibly low level historically, however when you consider that German and US bonds are paying effectively 0%, and bonds from Spain and Italy have both now fallen to below 1.4%, Australian bonds are very appealing.
The low international cash rates have been caused by the massive quantitative easing (QE) programs in the US, Europe and Japan, which have increased the supply of money globally, boosting the demand (which reduces the yields) for these US and European bonds, regardless of their quality.
What to do?
Investors in Europe and the US have to come to places like Australia to generate a low risk return above 2% on bonds or a higher risk return of 6% to 7% on our sharemarket. If the Australian interest rate remains constant, and low rates prevail in the US and Europe, the Australian dollar could move above 80 cents and theoretically back towards $1!
If that happens then there are a few key stocks that could outperform and still be safe if the dollar heads back towards 60 cents.
Flight Centre Travel Group Ltd (ASX: FLT) shares have recovered since falling to $31 in December and should see a pickup in outbound international travel if the Australian dollar jumps up again.
Sydney Airport Holdings Ltd (ASX: SYD) stands to benefit from improved passenger numbers and more inbound packages but also generates a solid dividend yield that's attractive to international and domestic investors.
JB Hi-Fi Limited (ASX: JBH) will benefit from lower Australian-dollar imports, improving margins on tech products purchased from the US.
The downside to this scenario is that it could see the Australian sharemarket fall as our miners and exporters would become less competitive, and would go against the accepted forecasts which have seen our sharemarket surge higher in 2015.