Yesterday the Australian dollar (AUD) hit a low exchange rate of $0.57 compared to the United States dollar (USD). The last time it was lower than this was for a 3 year period between 2000 and 2002. Prior to that it has never seen a price this low since it floated.
What’s behind this?
In the fog of war we are seeing across the markets it is hard to be specific. A flight to safety is likely the strongest reason. Currency traders are flocking to the world’s safest of haven investments, the United States dollar.
Other reasons for currency traders losing confidence include the anticipated impact of the bushfires on Q1 2020, on top of fears of the coronavirus impact on our economy and eventual impact on our major commodity exports.
All of this is exacerbated at home and abroad, because no amount of financial stimulus will make people risk their health or that of their families.
The benefit of a low exchange rate
This is a boon for exporters on the S&P/ASX 200 Index (INDEXASX: XJO) at a time when the nation sorely needs continued revenues.
Right now, the gold price between the US and Australia has diverged. The gold price has fallen markedly in USD value, yet through the magic of the low exchange rate it has remained at the highest AUD price in history.
In fact, all miners selling into international markets will see higher AUD earnings for identical USD spot price. This extends to agricultural commodity producers such as Graincorp Ltd (ASX: GNC)
Retailers depending on imports will be hit particularly hard by low exchange rates. This is on top of tighter supply chains due to coronavirus and falling sales as social isolation kicks in.
Companies like Accent Group Ltd (ASX: AX1), Lovisa Holdings Ltd (ASX: LOV) and other companies in the consumer discretionary sector are most exposed. They lack the defensive characteristics of (say) Woolworths Group Ltd (ASX: WOW). In the case of consumer staples, consumers will be have to pay the increased costs of externally sourced products.
This inflationary pressure will add to the potential for job losses, closures and debt defaults. It will also increase the likelihood of hardship.
Yesterday, the Reserve Bank of Australia introduced a raft of measures along with a rate cut, which may shore up confidence in the AUD. However, its primary focus is a credit crunch worse than any in economic history threatening interest rates.
There are definitely good and bad impacts from a low exchange rate. However, for investors it provides us with clarity when choosing shares during this opportunity of a lifetime. As long as the AUD remains low, companies selling in USD or sourcing products locally will have a distinct advantage.
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Daryl Mather owns shares of Austal Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Austal Limited, Cochlear Ltd., and CSL Ltd. The Motley Fool Australia has recommended Accent Group, Amcor Limited, and Cochlear 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.