Overnight the Australian dollar's incredible rally continued and finally saw it break through the 80 U.S. cents mark to reach a two-year high.
The local currency reached a session high of 80.1 U.S. cents, due largely to broad weakness in its U.S. counterpart.
That was quite the turnaround for the Australian dollar, having fallen as low as 78.8 U.S. cents at one stage yesterday following the release of weaker-than-expected inflation data.
The question on the lips of many investors now will no doubt be where next for the Australian dollar?
According to the latest Westpac Banking Corp (ASX: WBC) weekly report, economists at the bank believe the local currency has a long way to fall.
The bank has forecast the Australian dollar falling to 74 U.S. cents by September, 69 U.S. cents by June 2018, and finally 65 U.S. cents by December of next year.
I agree with Westpac on this and feel the Australian dollar is in danger of sharp declines in the coming months, especially if the U.S. Federal Reserve continues to periodically raise interest rates.
As U.S. rates rise I believe the yield differential is likely to cause the Australian dollar to lose its appeal with traders, creating significant selling pressure.
Furthermore, strong commodity prices have supported the currency in recent weeks. If these start to fade, this could put even more pressure on the currency.
How can you profit from this?
Whilst this wouldn't be great news for retailers like Nick Scali Limited (ASX: NCK) and Reject Shop Ltd (ASX: TRS) which predominantly pay for their imported products in U.S. dollars, it would be a bonus for companies that generate significant sales in the United States.
A few companies that could benefit greatly in my opinion are Ardent Leisure Group (ASX: AAD), Nanosonics Ltd. (ASX: NAN), and Treasury Wine Estates Ltd (ASX: TWE). Now could be a good time to take a closer look at them.
