MENU

Why I think the Aussie dollar is heading lower and some shares to profit

The Australian dollar is stuck at a 21-month low after it slipped under US72 cents on the weekend. We shouldn’t expect much of a bounce as the path of least resistance is down for the Aussie battler.

This could be a signal for large cap stocks to pull ahead of junior stocks as the S&P/ASX SMALL ORDINARIES (Index:^AXSO) (ASX:XSO) index has left the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) in the dust with a gain of 18%, versus 11% for the top 200 benchmark over the past year.

But the gap has recently been closing and the currency tailwind could push the share prices of large cap stocks ahead of those at the small-end of town.

Bigger companies tend to be exporters or have large overseas operations that earn in US dollars. Blood products group CSL Limited (ASX: CSL), building materials supplier Boral Limited (ASX: BLD) and steel manufacturer BlueScope Steel Limited (ASX: BSL) are just some examples of large caps that will benefit from the weakening Aussie, which hasn’t fallen this low since the end of 2016.

There is a greater chance for our dollar to test new multi-month lows than for a sustained recovery, in my view, particularly in light of the new house price data.

The latest data from CoreLogic shows the Sydney prices are contracting at the fastest pace in nine years and Melbourne in almost six years.

This, combined with the out-of-cycle mortgage rate increases by Westpac Banking Group (ASX: WBC) and other banks, as well as the leadership debacle in Canberra, mean the Reserve Bank of Australia can sit on record low interest rate settings till 2020, if not a little longer.

The widening interest rate differential between Australia and the US is weakening the Aussie dollar but there are external factors that will also keep our currency on the back foot.

The trade war rhetoric from US President Donald Trump against a wide range of countries, including China and the European Union, is driving investors into the safety of the US dollar. The air of nervousness is unlikely to dissipate anytime soon.

Meanwhile, China’s growth is slowing and that spells more weakness for the Aussie given the positive correlation between Chinese economic expansion and our dollar. China is bracing itself for a further slowdown as Trump prepares to slap tariffs on US$200 billion worth of Chinese imports to the US.

On the flipside, there aren’t any obvious positive catalysts for the Aussie – not in the near-term anyway. If our dollar can sustain a bounce from these lows, it will need a trigger.

Experts quoted in the Australian Financial Review today are also struggling to identify a trigger for an Australian dollar bounce as the relatively strong US economy and share market have emboldened Trump who is intent on shaking-up the global economic order.

Having said that, predicting where the exchange rate will end up is a mug’s game. Just when you think things can’t be better for the US dollar, sentiment will turn.

However, I think it’s important for investors to have a meaningful weighting towards stocks with large US-dollar exposure (or international shares), if they don’t already have that.

Top 3 ASX Blue Chips To Buy In 2018

For many, blue chip stocks mean stability, profitability and regular dividends, often fully franked..

But knowing which blue chips to buy, and when, can be fraught with danger.

The Motley Fool’s in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of "The Motley Fool’s Top 3 Blue Chip Stocks for 2018."

Each one pays a fully franked dividend. Each one has not only grown its profits, but has also grown its dividend. One increased it by a whopping 33%, while another trades on a grossed up (fully franked) dividend yield of almost 7%.

The names of these Top 3 ASX Blue Chips are included in this specially prepared free report. But you will have to hurry. Depending on demand – and how quickly the share prices of these companies moves – we may be forced to remove this report.

Click here to claim your free report.

Motley Fool contributor Brendon Lau owns shares of BlueScope Steel Limited, Boral Limited, and Westpac Banking. 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 Scott Phillips.

The 5 mining stocks we’re recommending in 2019…

For decades, Australian mining companies have minted money for individual investors like you and me. But if you believe the pundits and talking heads on TV, those days are long gone. Finito! Behind us forever…

We say nothing could be further from the truth. To earn the really massive returns, you’ve got to fish where others aren’t fishing—and the mining sector could be primed for a resurgence. That’s why top Motley Fool analysts just revealed their exciting new research on 5 ASX miners they believe could help you profit in 2019 and beyond…

Including:

The best way we see to play the global zinc shortage… Our #1 favourite large-cap miner (hint: it’s not BHP)… one early-stage gold miner we think could hit the motherlode… Plus two more surprising companies you probably haven’t heard of yet!

For free access to our brand-new research, simply click here or the link below. But be warned, this research is available free for a limited time only, and we reserve the right to withdraw it at any time.

Click here for your FREE report!