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Why Citi is betting on an Aussie dollar rebound and how this could impact your shares

High net worth investors have lifted their bets on a rebound in the Australian dollar to the highest level since 2016 after the Aussie tumbled around 11% over the past year, according to Citigroup.

The notional amount of Australian dollars purchased against the US greenback between July and August has doubled based on the broker’s estimates and as reported in the Australian Financial Review.

Local share investors should watch this trend closely as the volatile exchange rate can have a material impact on your share portfolio.

The Aussie had hit a more than two-year low of just under US71 cents earlier this month as US President Donald Trump ratcheted up his trade attack on China and Turkey.

This sent emerging currencies into a tailspin and that has dragged on sentiment towards the local dollar, which in turn helped fuel interest in stocks with material US dollar exposure – including building materials supplier Boral Limited (ASX: BLD), glove maker Ansell Limited (ASX: ANN) and blood products group CSL Limited (ASX: CSL).

But this could change if Citi’s forecast is on the money as the broker is predicting the Aussie battler will jump to US77 cents in 12 months from its current level of around US71.5 cents.

This bullish call comes even as Citi acknowledges the potential for more near-term weakness in the Australian dollar given the unpredictable geo-political environment, with Trump threatening to slap tariffs on all US$500 billion plus in Chinese imports into the US.

Citi believes the market will soon refocus its attention on interest rate hikes by the Reserve Bank of Australia and that will help the Aussie regain some of its lost ground, although you won’t find consensus among currency experts on where the exchange rate will be over the medium term.

Westpac Banking Corp (ASX: WBC) has a mid-2019 target of US70 cents although the recent slump in the Aussie from around US76.5c in July has prompted its economists to believe their target may be achieved sooner than anticipated, according to the AFR.

Capital Economics and HSBC Holdings are also predicting further downside for the Aussie in 2019, and I believe the naysayers are right due to the absence of any real catalysts for our dollar with a slowing Chinese economy and the threat of a harder-than-expected property price fall in this country.

But predicting currency movements is a mug’s game in my view. While the currency may have an impact on valuation of stocks on the ASX, one shouldn’t be investing in a company primarily for the exchange rate tailwind.

Nothing substitutes for quality management and a sound business model even if you have to put up with currency fluctuations as the exchange rate is only a small driver of value over the longer-term.

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Motley Fool contributor Brendon Lau owns shares of Boral Limited and Westpac Banking. The Motley Fool Australia has recommended Ansell Ltd. 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.