If the Reserve Bank of Australia ever needed the US Federal Reserve to start increasing interest rates, it's now.
The Federal Reserve, or the Fed, was tipped to begin hiking interest rates last month for the first time in nearly a decade, but ultimately decided the economy wasn't quite ready for the move.
Although it is fairly adamant it will still increase rates before the end of the year, investors are expecting that could now be delayed until 2016 following the release of a weaker-than-expected jobs report.
Why is it so important for the Reserve Bank?
The Australian dollar has been trending lower in recent times as global investors poured their cash into the United States in anticipation of higher interest rates, and therefore superior returns. The local currency hit a low of US 68.98 cents last month, which was its lowest level since early 2009.
The Fed's expected delay is now supporting the Australian dollar however, as is an increase in confidence surrounding China's economic growth prospects. The local dollar is currently fetching US 73.24 cents, near its highest level in seven weeks.
A weaker Australian currency is important to the Reserve Bank of Australia as it will help strengthen our economy by making our exports more competitive on a global scale. It also makes importing items more expensive, therefore reducing the amount we bring into our economy from other nations.
If the Australian dollar continues to strengthen, it could put the RBA under even more pressure than it is currently under to reduce local interest rates, with some pundits suggesting the cash rate will fall to just 1.5% sometime next year.
Why a weak Australian dollar can be great for you
Despite its recent rebound, the Australian dollar is still sitting at a level that is favourable to local investors. While a weak Australian dollar can make business more expensive for companies who import most of their goods, it can provide a strong tailwind for those who export their products and those which generate a large portion of their earnings overseas.
Take Westfield Corp Ltd (ASX: WFD) as a perfect example. Although the company's shares are listed on the ASX, it generates all of its earnings overseas with the majority coming from the United States, and the remainder coming from the United Kingdom.
When it reports its earnings, those earnings become more valuable for Australian-based investors thanks to the favourable exchange rate. Westfield Corp's shares are currently trading for $10 each and it could be a great company for long-term investors to consider buying today. Those investors could also look to buy ResMed Inc. (CHESS) (ASX: RMD) and Cochlear Limited (ASX: COH), which both develop and manufacture products for the treatment of medical conditions (sleep apnea and cochlear-implantable devices, respectively). Both companies are trading at reasonable prices today and could offer excellent long-term value.
