Is the Australian dollar set to crack under US70 cents?

The Aussie battler is clawing back some of yesterday’s losses with the currency inching up from its two-and-a-half-year low.

But some experts believe it’s only a matter of time before our dollar tumbles below the US70 cent-mark, which will open the way for the Aussie to fall to around US65 cents.

The path of least resistance for the Aussie is down and the downtrend is likely to last for months, according to the Australian Financial Review. This will create winners and losers on the ASX – but the winners may not be as obvious as you might think.

Growing hostilities between Chinese and US trade officials will keep the greenback well supported as the two largest economies appear to be heading towards an all-out trade war.

Trump’s tax cuts are also pushing the US dollar higher even though this will only be a temporary shot in the arm for the US economy.

This is because the fiscal stimulus may well force the US Federal Reserve to lift interest rates by more than it normally would as the central bank tries to rein in inflation.

On the other hand, the Reserve Bank of Australia has no room to lift rates and the growing differential between the official interest rates between our two countries will only keep the Aussie dollar on the backfoot.

What’s more, there doesn’t seem to be any obvious circuit-breaker for our embattled dollar, which has fallen even harder than the Philippine peso!

This is probably because the Aussie battler is seen as the perfect instrument to short-sell as a hedge against a slowdown in China due to the trade war.

But investors thinking that they should buy any ASX stock with large US dollar exposure in response will need to think more deeply about the strategy.

It probably won’t be the best outcome to buy companies that generate US dollar sales if their business is leveraged to global economic cycles.

While I like stocks like logistics group Brambles Limited (ASX: BXB), this is a good example of what I mean.

I think US-exposed stocks with less cyclical businesses may prove to be a better safe harbour. This includes diagnostic imaging group Sonic Healthcare Limited (ASX: SHL), plumbing equipment supplier Reliance Worldwide Corporation Ltd (ASX: RWC) and even glove maker Ansell Limited (ASX: ANN) – assuming it can avoid being caught up in the tariffs.

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Motley Fool contributor Brendon Lau owns shares of Brambles Limited and Reliance Worldwide Limited. 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.

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