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Is the Aussie dollar set to rally to US84 cents in 2019?

It’s a pretty wild prediction as far as forecasts go, but a leading currency expert is warning us to prepare for an Aussie dollar revival that will send our dollar shooting to US84 cents by the end of next year.

The Aussie is currently fetching a little over US71 cents and the forecast 18% surge in our currency will have a material impact on your share portfolio and our economy – if it comes to pass.

But Bank of America Merrill Lynch’s (BoAML) head of G10 foreign exchange strategy Thanos Vamvakidis is known for making controversial and accurate calls, according to the Australian Financial Review.

Most experts are tipping the Aussie to hover around the US70 cent mark next year although Vamvakidis thinks many are underappreciating the strength of our economy and overestimating US economic growth.

Australia has a strong labour market and has a reasonably diversified economy that can withstand some level of slowdown in China.

On the flipside, he estimates that the US dollar is 5% to 7% overvalued and that too many traders are “long” on the greenback (betting that the US currency will rise).

This means the US dollar is a crowded trade and any hiccup will send the US currency falling hard as traders rush for the exits.

That scramble may be sparked by the realisation that US President Donald Trump’s tax cut only provides a temporary and one-off boost to the US economy. Its impact is already starting to fade.

The other risk is the US mid-term elections. A decisive win by the Democrats could trigger a US dollar slide as Trump’s ability to get more stimulus into the economy will become a lot harder to implement, explained Vamvakidis.

Such a strong rally in the Aussie is not out of the question although I am still positioning my portfolio for a further fall in the Aussie to between US65 cents and US69 cents next year due to the widening interest rate differential and housing market weakness.

This means I have a bias towards large caps with material US dollar exposure, such as Brambles Limited (ASX: BXB) and Boral Limited (ASX: BLD).

However, if the Aussie does come fighting back in 2019, it’s importers that will benefit the most from the currency.

This includes retailers like Reject Shop Ltd (ASX: TRS) and McPherson’s Ltd  (ASX: MCP) that buy products in US dollars, as well as local industrials like fuel retailer Caltex Australia Limited (ASX: CTX) given that it purchases gasoline in US dollars.

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Motley Fool contributor Brendon Lau owns shares of Boral Limited, Brambles Limited, and The Reject Shop Limited. The Motley Fool Australia has recommended 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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