The Aussie battler is on a fightback with the local dollar breaking its downtrend by bouncing sharply from its near three-year low of just above US70 cents.
The Aussie is currently fetching US73.1 cents and some experts think the currency has not only bottomed but is poised to retake the US74 cent mark.
There are several factors supporting the rebound but one of the most bullish signs in my view is the fact that the Aussie is holding comfortably above US73 cents despite the cold-shoulder Asia-Pacific Economic Cooperation (APEC) meeting.
The threat of an escalating trade war between the US and China was exposed when the 21-member inter-government forum couldn’t agree on a joint communique at the close of the meeting.
They couldn’t even agree to disagree as China refused to put its name to the communique.
The growing tensions between the two largest economies are one reason for the “risk-off” mood among share investors as the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index fell 0.6% in late afternoon trade.
The strong domestic labour market, improving terms of trade and an upgrade to growth forecast for our economy from the Reserve Bank of Australia (RBA) are seen as further tailwinds for our dollar.
The Australian dollar is the second-best performing group of G10 currencies this month behind the Kiwi, according to Bloomberg, and that stands in sharp contrast to how it’s been tracking over the past year as the Aussie was the worst performing currency among the majors.
If the Aussie bulls are on the money, it will have a significant impact on our share market as the exchange rate creates winners and losers.
The big winners are likely to be small cap stocks as these companies are typically importers of goods and the stronger Aussie will increase their buying power. These may include furniture group Nick Scali Limited (ASX: NCK), hospital equipment supplier Paragon Care Ltd. (ASX: PGC) and clothing retailer Noni B Limited (ASX: NBL).
Local industrial companies suffering from growing cost pressures, such as building materials group CSR Limited (ASX: CSR) could also find some relief from a stronger Aussie, although that may not be enough to offset the slumping housing market.
On the flipside, ASX-listed companies with significant US operations could see revenue growth come under pressure when their US-dollar earnings are converted into Aussie dollars.
These companies include hearing implant maker Cochlear Limited (ASX: COH), packaging group Amcor Limited (ASX: AMC), blood products maker CSL Limited (ASX: CSL) and plumbing products company Reliance Worldwide Corporation Ltd (ASX: RWC) – just to name a few.
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Motley Fool contributor Brendon Lau owns shares of Paragon Care Limited and Reliance Worldwide Limited. The Motley Fool Australia has recommended Cochlear Ltd. and Paragon Care 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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