The Australian dollar rallied to a four-week high earlier this morning after the US Federal Reserve decided to leave interest rates on hold, citing weak global conditions as one of the main reasons behind the decision.
Investors around the world have, for a long time, expected that September would be the month the Fed would finally increase interest rates. The US greenback has strengthened against a basket of currencies (including the Australian dollar) as a result, with many foreign investors buying US dollars to take advantage of the higher returns.
Instead of hiking interest rates however, the Fed's chair, Janet Yellen, announced that interest rates would remain unchanged, citing weak global conditions and the slowdown in China as two of the major reasons behind the decision. Currency investors responded swiftly, sending the Australian dollar soaring to a high of US 72.76 cents.
Source: Yahoo! Finance
However, it quickly retreated back to US 71.91 cents when Yellen said there was still a possibility of a rate increase before the end of the year. In other words, such a decision has been postponed rather than cancelled. The dollar is still trading 4.2% above its recent six-year low (US 68.98 cents).
An opportunity to profit
Whether or not the Fed does increase rates before the end of the year shouldn't be a great concern for long-term investors. The fact of the matter is, US interest rates will rise, while Australian interest rates will stay low for the foreseeable future. Indeed, some forecasts even suggest the Reserve Bank of Australia will cut interest rates again this year.
While the US economy is in recovery mode – albeit slowly – Australia is facing an uphill battle where we must contend with a high unemployment rate, crashing commodity prices and a slowdown in China (amongst other factors). This contrast is likely to see the Australian dollar fall below its current level, with some analysts suggesting a dip into the US 50s range isn't out of the question.
What this means is that investors who position their portfolios accordingly could benefit from further depreciation of the Aussie dollar against the US greenback by buying high-quality companies which generate a significant portion of their earnings overseas.
That could include medical device manufacturers ResMed Inc. (CHESS) (ASX: RMD) and Cochlear Limited (ASX: COH), as well as shopping centre behemoth Westfield Corp Ltd (ASX: WFD) and global packaging giant Amcor Limited (ASX: AMC).
As the Australian dollar falls, the earnings these companies generate overseas become more valuable when measured in Australian dollars, benefiting those investors holding the shares.
It's impossible to predict with any accuracy exactly what the Australian dollar will be worth tomorrow, next week or even next year, but there is certainly a valid argument that suggests it still has further to fall.
