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Why the Australian dollar could fall to just US50 cents

Credit : Will

The Australian dollar has fallen below US 72 cents with many experts suggesting there are even more declines still to come.

Indeed, the AUD fell to a low of US68.28 cents earlier in the year before rallying due to higher commodity prices and lowered expectations of a hike in interest rates in the United States. Now, however, it’s on the retreat once again losing almost 8% since it peaked at more than US78 cents in April.

There are a number of factors that have caused the pullback, including disappointing inflation data and expectations that the recent rally in the price of iron ore will not last. Meanwhile, it is believed the US Federal Reserve is now on the verge of increasing interest rates again, while the Reserve Bank of Australia is set to go the other direction.

The RBA cut the cash rate by 25 basis points earlier this month, and some say it could cut again within the fortnight. Stuck at 1.75% currently, some economists, including those at JP Morgan, believe the cash rate will be at 1% by June 2017. BT Investment Management went one step further and said “a move to 0% or lower (is) a distinct possibility” (my emphasis).

It is for these reasons that expectations are now also mounting that the Australian dollar itself has further to fall. Consider this from The Sydney Morning Herald yesterday (again, my emphasis):

“The Australian dollar remains overvalued, and could head towards US50¢ as it loses its de facto safe-haven status, according to research from ANZ Banking.”

Other forecasts haven’t been for the Australian dollar to fall quite that low, with many sitting around US65 cents or so, but it does indicate the mood in the market that the local currency is still overvalued against the US greenback. And for investors, that could represent an opportunity.

Of course, the most direct way to benefit from a falling currency is to buy US dollars, and potentially invest in US-listed companies. However, many investors are uncomfortable with investing offshore as it does create more paperwork and introduce more risks.

For those investors who are unwilling to invest directly in US shares, a falling Australian dollar will also benefit companies such as Westfield Corp Ltd (ASX: WFD) and Cochlear Limited (ASX: COH), which generate much of their earnings overseas. ResMed Inc. (CHESS) (ASX: RMD) is another great example, as is Sirtex Medical Limited (ASX: SRX).

Investing in businesses such as those can be beneficial for local investors because a weaker Australian dollar can help to boost their earnings. Of course, an unexpected rise in the dollar could also be detrimental for them in that regard, although there are plenty of signs that suggest the AUD does have further to fall.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks 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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