Talk of another official interest rate cut is back on the cards with the Australian dollar remaining stubbornly high, and impacting Australia's ability to compete on the international stage.
The Reserve Bank of Australia has for a long time been targeting a US75 cent exchange rate, in order to help rebalance the economy, and allow our exporters to compete with foreign rivals. While the local currency fell strikingly close to that mark earlier this year, it has since risen above US77 cents and traded higher than US78 cents in the early hours of this morning.
The strong Australian dollar has been one of the biggest factors pressuring Australia's central bank to lower interest rates even further, despite having cut interest rates by a combined 50 basis points in February and May this year. As highlighted by the Fairfax press, the market is now pricing in a 68% chance of a third rate cut before the end of the year, with 60% saying it will happen in November.
At the same time, the US Federal Reserve is expecting to increase its own interest rates before the end of the year, but economists believe it will come later than first anticipated. As such, the RBA shouldn't rely too heavily on the Fed to strengthen the US dollar, and could instead be forced to take matters into its own hands.
One way or another, the Australian dollar needs to weaken and most economists believe it remains significantly overvalued. Indeed, Morgan Stanley recently suggested it would fall to just US62 cents in 2016, which would represent a decline of 23% from today's level.
In order to profit from this, investors should look to expose their portfolios to a number of high quality companies that generate a large portion of their earnings overseas – particularly in the Americas. Westfield Corp Ltd (ASX: WFD) is a perfect example, as are ResMed Inc. (CHESS) (ASX: RMD), Amcor Limited (ASX: AMC) and Macquarie Group Ltd (ASX: MQG).
With interest rates set to fall further, investors should also look to bolster their dividend stocks for a source of superior income.
