The Australian dollar has hit a yearly low of 70.36 US cents in early Monday morning trade. Last week's interest rate increase in the United States and the general volatility in global financial markets has seen the Australian dollar lose almost 4% this month. This brings the year to date loss against the greenback to just shy of 10%.
The RBA has left the cash rate unchanged for 28 months in a row and current expectations are for no increases in 2019. The cash rate in the United States is currently at 2.25% versus the Australian cash rate of 1.50%. The interest rate differential between Australia and the United States is expected to widen in 2019 with American interest rates forecast to rise again next year.
Furthermore, with the Australian economy slowing on the back of falling house prices a cut in local rates should not be ruled out. This would add further pressure on the currency and could see the Australian dollar trade below 70 US cents for the first time since early 2016.
Stock market impact
For Australian based investors, a falling Australian dollar is not necessarily bad news as there are a number of ASX listed companies that stand to materially benefit from a depreciating currency. Australian companies that generate a significant amount of earnings offshore benefit from a falling currency as these earnings rise when converted back into Australian dollars.
Healthcare stocks such as Cochlear Limited (ASX: COH), CSL Limited (ASX: CSL) and ResMed Inc. (ASX: RMD) are three businesses that can profit from a falling Australian dollar given the global nature of their operations.
The performance of ResMed is correlated to the AUD/USD exchange rate as the Australian listed scrip represents a 1/10th interest in the NYSE scrip. Over the last 12 months shareholders of the NYSE scrip have seen a 23% gain in their holdings. In contrast, shareholders of the ASX scrip have enjoyed a 37% increase due to the falling Australian dollar.
The outperformance has been even better over the last 5 years, with ASX scrip holders seeing their holding climb 204% versus their NYSE counterpart's gain of 130% as the Australian dollar has fallen substantially from the 90 US cents level in late 2013.
Other companies listed on the ASX that could see a currency related boost to their earnings include Altium Limited (ASX: ALU), Ansell Limited (ASX: ANN) Computershare Limited (ASX: CPU), Macquarie Group Ltd (ASX: MQG) and Mayne Pharma Group Ltd (ASX: MYX).
