The Australia dollar is making a tentative bounce after falling to fresh 11-year lows this morning, although this won’t quell speculation that the Aussie could soon be testing US62 cents.
Should investors be worried? Afterall, the Aussie currency tends to move with things that are seen to be positives for our economy – namely the share market and the all-important iron ore price!
To illustrate this point, the recovery in our dollar from this morning’s low of US64.8 cents coincided with the rebound in the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index from its deep morning slump. The index is now just 0.7% in the red compared to its more than 2% sell-off.
Don’t be afraid of the falling Aussie
However, a weaker Aussie is, on a net basis, better for our larger cap stocks. So, investors shouldn’t be concerned if our dollar slips under US65 cents again as some experts believe it will.
It isn’t just the coronavirus that is conspiring against the Aussie battler, which had already been under pressure from bushfires and the devastating drought.
The possibility that COVID-19 will send China into a recession will undoubtedly be a big negative for our currency, but it’s also the likely prospect of interest rate cuts here that could send the Aussie tumbling towards US60 cents in the coming weeks.
Bigger than expected rate cuts
The market is pricing in around an 80% chance that the Reserve Bank of Australia (RBA) will lower rates by 25 basis points tomorrow. That’s mostly priced into our dollar.
But the RBA could be forced to slash the cash rate by 50 basis points instead as traders speculate that the US Federal Reserve will have to take the more drastic approach to shore up investor confidence later this month.
Even if the RBA opts to only cut by 25 points, it may have to lower the official rate again next month to deal with the ongoing fallout from the corona-crush.
A 50-point reduction will put our cash rate at just 0.25 percentage points. That’s as good as “interest free” and zero is not the floor either. Europe is paying negative rates, and while no credible economist is tipping that here, it’s not impossible or inconceivable.
Stocks to benefit from a weak Aussie
Regardless of how low the Australian dollar can go, it’s more likely to stay down than go up. This means ASX stocks with large US dollar exposure will have an edge.
This includes the James Hardie Industries plc (ASX: JHX) share price, which was swept up in the market sell-off despite the building materials group posting a decent profit result last month.
I also like the Ansell Limited (ASX: ANN) share price. It too is exposed to the US and its gloves should be in hot demand from the virus-induced panic.
Another with defensive growth characteristics and greenback exposure is the AMCOR PLC/IDR UNRESTR (ASX: AMC) share price.
Let’s also not forget our miners with material operating assets in Australia. They sell their commodities in US dollar and pay their bills in Aussie. It’s a double win for the likes of Fortescue Metals Group Limited (ASX: FMG) and Evolution Mining Ltd (ASX: EVN).
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The Motley Fool Australia has recommended Amcor Limited and Ansell Ltd. 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.