How the longest winning run for the Aussie dollar could hurt your share portfolio

The Australian dollar has broken a new record as it notched up its 14th consecutive trading session of gains on Friday, according to a report on Business Insider.

This is the longest winning streak for the Aussie since it was floated 34 years ago and the strength of the local currency is already having an impact on our share market.

Whether you’ve noticed it or not is another story and the ignorance could end up costing you – particularly as we head towards the February reporting season where continued strength of our dollar could start to impact on the outlook statements from our favourite blue-chips.

The Aussie is defying expectations of many currency experts who point to the widening interest rate differential between the US and Australia as well as the expected pick-up in growth in the world’s largest economy to push the greenback ahead of our dollar.

But this has long been well known by the currency market, which is pricing in a very gradual increase in US interest rates this year – more gradual than what the US Federal Reserve is signalling to the market.

Indeed, the rise of the Aussie battler is more about US dollar weakness than it is about Australian dollar strength, as the Aussie has not been performing well against other major currencies.

The resilience of the Aussie will create winners and losers on our share market with resources stocks, like Rio Tinto Limited (ASX: RIO) and Oil Search Limited (ASX: OSH), among the earliest beneficiaries as the weakening US dollar propelled commodities to a record winning run as well.

Unfortunately, there will be more losers than winners among our large cap stocks if the Aussie continues to outperform this year as they either generate a significant proportion of their income in US dollars (and will lose out when they report earnings in Australian dollars), or the currency makes them less competitive against Asian rivals who charge in US dollars.

Stocks that fall into the first category include the likes of blood products company CSL Limited (ASX: CSL) and share registry services group Computershare Limited (ASX: CPU) – just to name a few.

Stocks in the second category include steel manufacturer BlueScope Steel Limited (ASX: BSL) and cement supplier Adelaide Brighton Ltd. (ASX: ABC).

However, it is certainly not a given that the Australian dollar will remain strong this year. Currency forecasting is a mug’s game, particularly over the medium to longer term.

The US dollar could regain favour pretty quickly if the market believes that the Fed will be more aggressive in lifting rates, and Trump’s stimulatory tax cuts could provide such a catalyst.

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Motley Fool contributor Brendon Lau owns shares of Brambles Limited and Rio Tinto Ltd. The Motley Fool Australia has recommended Computershare. 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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