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Top forecaster warns Aussie to drop below US70 cents in a Trump Trade War

ASX investors should sit up and listen. One of the most accurate currency forecasters is telling its clients to short the Australian dollar as our currency is set to weaken further.

That will have implications for shares on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) given that many are exposed to exchange rate fluctuations in some way.

Bloomberg reported that CIMB Bank believes the Aussie will weaken against the Japanese yen and the US dollar due to the deepening trade war between China and the US.

The bank is ranked the most accurate in predicting the direction of the Aussie in Bloomberg’s second-quarter ranking.

Our stocks have limited exposure to the yen, but predictions by CIMB that the Aussie is at risk of falling under US70 cents if the trade war escalates will impact US leveraged shares.

The trade spat is intensifying with US President Donald Trump threatening to impose tariffs on all Chinese imports.

A trade war is a negative for the Aussie as retaliatory action from China will inadvertently impact on the upstream or downstream of the country’s value chain, and lead to a further deterioration in global risk sentiment, explained CIMB.

The warning comes as the Aussie is coming under pressure from the weak inflation reading (click here to read more on the inflation data), which reinforces expectations that the Reserve Bank of Australia will keep interest rates at record lows while the US Federal Reserve is lifting its.

The Aussie battler slipped 0.2% to US74.1 cents at the time of writing and a further 6% drop under CIMB’s scenario will create winners and losers on our market.

Stocks with large US dollar exposure will be smiling as their bottom lines will get a boost when earnings are converted into Australian dollars.

These include a number of outperforming stocks that are already trading at a premium to the market. Pokies machine maker Aristocrat Leisure Limited (ASX: ALL), blood plasma group CSL Limited (ASX: CSL) and sleep disorder treatment device manufacturer RESMED/IDR UNRESTR (ASX: RMD), or ResMed, are some examples.

It’s not a bad idea to keep backing this group as the currency effect could offset (at least in part) any share price retreat if risk appetite were to weigh on equities.

However, importers will be under pressure as their cost of goods could be set to rise. These stocks may include furniture retailer Nick Scali Limited (ASX: NCK), discount variety chain Reject Shop Ltd (ASX: TRS) and four-wheel drive accessories company ARB Corporation Limited (ASX: ARB).

There’s another winner from the weakening Aussie that the experts at the Motley Fool are bullish on. The stock has a large US-exposure and has outperformed over the past year but is well placed to keep outperforming in FY19.

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Motley Fool contributor Brendon Lau owns shares of Aristocrat Leisure Ltd. and The Reject Shop Limited. The Motley Fool Australia has recommended ARB Limited, ResMed Inc., and The Reject Shop Limited. 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 Scott Phillips.

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