The Australian dollar fell through a key level last night and ASX investors should care as the Aussie will have an impact on your stock portfolio!
The exchange rate creates winners and losers, and that means you should consider the outlook for the currency when deciding what shares and sectors to invest in, particularly when it comes to those in the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.
This is why the prediction by one of the most accurate currency forecasters (according to Bloomberg) that the Aussie battler is about to jump to US74 cents before the year end has caught my attention, particularly when our dollar has fallen below the psychologically-important US70 cent mark last night and is currently fetching US69.98 cents!
Are we in for a currency bounce?
The last time the Aussie fell below US70 cents was three months ago when it very briefly touched ~US69.85 cents before surging up to US72 cents. Given that that was the day after New Year's Day, some might think the dip was just an aberration as most traders would be away.
The question is whether this time will be any different. Bloomberg quoted Tempus Inc., which submitted the most accurate prediction for the currency in Bloomberg's first quarter rankings, as saying the Aussie is set to benefit from a deal between the US and China to set aside their trade differences and a pick up in economic activity in the region on the back of infrastructure projects.
ASX-listed companies with large offshore exposure won't like to see this forecast come through. A weaker local dollar boosts their bottom line when foreign currency sales are converted back into the Aussie.
ASX companies with much to lose
Packaging group Amcor Limited (ASX: AMC) and engineering services company Worleyparsons Limited (ASX: WOR) fit into this category thanks to recent large acquisitions of US companies.
There are many other large caps that will also be pressured by a stronger Aussie. These include building materials group Boral Limited (ASX: BLD) and steel maker BlueScope Steel Limited (ASX: BSL) – just to name a few.
But you won't find consensus among experts. Some, including AMP Limited (ASX: AMP) believe the local dollar will fall towards the US60 cent mark and I too see more downside risks for our currency, particularly as the Reserve Bank of Australia (RBA) looks ready to cut the interest rate.
Foolish takeaway
In contrast, the US Federal Reserve has played down expectations of a near-term cut, and its more hawkish tone is the key reason why the Aussie is on the backfoot this morning.
Given the other threats to our domestic economy from the housing market slump and zero inflation, I think Australia can't afford to have a currency that's much above US71 cents.
All things equal, a high currency generally deflates prices of goods as a lot of raw material is priced in US dollars – and Australia right now needs some inflationary pressure to creep back into our system, particularly if we want to see wage growth.
