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The A$ tumbles to new lows and could hit 65 US cents

The Australian dollar has crashed to a three and a half year low this morning and some experts believe it’s going lower as it’s becoming a favourite target for short-sellers.

The Aussie slumped to 68.9 US cents and this is the first time it’s gone under the 69 US cent mark since January 2016!

There are predictions that the Aussie battler won’t bottom until it hits 65 US cents with financial institutions like Normura Holdings Inc. urging investors to short our currency ahead of tomorrow’s federal elections, according to a report on Bloomberg.

Short-sellers delight

Shorting is making a bearish bet on an asset. Traders do that by borrowing the asset to sell on-market with the aim of buying it back at a lower price down the track to profit from the difference.

ASX investors should pay attention to the currency. While the exchange rate isn’t normally something that is top of mind when it comes to constructing your domestic share portfolio (there are usually bigger considerations), it should be this time round as our dollar could be moving more than normal in the shorter-term.

The Aussie is on a new trend after being stuck between 73 US cents and 70 US cents for months. I’ve noticed whenever the currency breaks out of its trading range, the moves become more volatile in the short-term.

Potential for bigger moves

A move down towards 65 US cents would be a very big move and some experts believe short-sellers are targeting the stock as it’s a perfect instrument to use to profit from (or hedge against) the escalating trade war between the US and China.

The outlook for our domestic economy isn’t great either. The case is building for the Reserve Bank of Australia to cut the official interest rate here to new record lows, which will pressure the Aussie.

So far, most investors have ignored the weakening Aussie (judging by headlines in the mainstream press), but that could be about to change.

As the public becomes more aware of the potentially big fall in the Aussie, the attention will start to impact on a range of ASX shares.

Foolish takeaway

The weaker Aussie is usually bad news for companies with domestically focused businesses as it tends to drive up the cost of goods they have to purchase in US dollars. Retailers from our supermarkets like Woolworths Group Ltd (ASX: WOW) to discretionary products chains Beacon Lighting Group Ltd (ASX: BLX) and Noni B Limited (ASX: NBL) could feel the squeeze.

Further, the lower dollar could hurt consumer spending too at a time when wage growth is anaemic.

I think the Aussie will stay on the backfoot through 2019 and this is why I am overweight on offshore earners and resources (particularly those with significant operations in Australia as their cost base is denominated in Australian dollars).

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Motley Fool contributor Brendon Lau owns shares of Woolworths Limited. The Motley Fool Australia has no position in any of the stocks mentioned. 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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