Don't look now but the upcoming reporting season has just become even more complicated with the Australian dollar breaking above US77 cents last night. This will add to the convoluted outlook for ASX-listed companies who are already battling weak wage growth, rising interest rates, sub-par economic growth and a wave of disruptions to established business models.
The rebound in the Australian dollar will catch most off guard as many were counting on the local currency weakening in the face of rising US interest rates, a slowdown in China's growth and the sluggish Australian economy that is growing well below trend.
If the latest jump in the currency wasn't enough, the outlook for the Aussie battler has just gotten more bullish with experts predicting further gains for the Australian dollar despite the fact that the interest rate differential between Australia and the other major economies is likely to increase with the Reserve Bank of Australia likely to keep interest rates at record lows for the rest of this year.
This is because of the more dovish than expected comments from the US Federal Reserve chairperson Janet Yellen last night that the Fed will take the slowly and softly approach when it comes to raising rates for the world's biggest economy.
At the same time, commodity prices are staging a bit of a comeback themselves with iron ore increasing 2.9% while the West Texas Intermediate crude oil price climbed above US$46 a barrel.
If the Australian dollar continues marching higher, it will shape the upcoming reporting season when companies not only release their profit results but also give an indication on the outlook for their businesses. You can bet they will be talking about the exchange rate if it continues to capture headlines.
As always, the exchange rate will create winners and losers. Unfortunately, there will be more losers than winners among our large cap stocks due to our nation's export orientation. One obvious group is the miners as the commodities they sell are priced in US dollars. The higher the Australian dollar, the lower the translated profit from the likes of BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO).
But it is those with mainly or only Australian-based assets that will feel the margin pinch the most as their costs are priced in the rising local currency.
Our large healthcare companies like CSL Limited (ASX: CSL) and Cochlear Limited (ASX: COH) won't be immune either due to their increasing global footprint, while other industrial stocks like logistics giant Brambles Limited (ASX: BXB), building materials company Boral Limited (ASX: BLD) and packaging group Amcor Limited (ASX: AMC) will find themselves in pretty much the same boat.
If you thought our favourite banks like Commonwealth Bank of Australia (ASX: CBA) are totally insulated from a higher Aussie, think again. Most of their funding comes from offshore and a stronger Australian dollar will mean they will get less bang for every dollar of debt they raise in another currency.
On the flipside, one sector that may see renewed support from a rebounding Aussie is retail. That would be a welcome relief as the sector has been in the doldrums due to weakening consumer confidence and fears about the arrival of US online shopping titan Amazon.
But not all retailers will benefit directly from the resurgence of the Australian dollar. It's mainly those that do direct sourcing of products (as opposed to buying from local distributors) that will stand the most to gain. From this respect, electronics retailer JB Hi-Fi Limited (ASX: JBH) won't benefit as much as furniture retailer Nick Scali Limited (ASX: NCK) and discount variety chain Reject Shop Ltd (ASX: TRS).
It's still a bit early to worry about the exchange rate at this point, but given that it no longer seems improbable that the Aussie can run towards US78 cents, we would be wise to keep a closer eye on the dollar or risk getting caught off guard.
