The skyrocketing Australian dollar is catching experts off-guard and could soon prove to be a new risk to the ASX reporting season.
The Aussie battler charged above US72 cents for the first time since early 2019 and is likely to push even higher.
Why ASX investors should care is because many S&P/ASX 200 Index (Index:^AXJO) stocks have US dollar exposure. A stronger Aussie means lower earnings when profits are converted into the local currency.
Strong Aussie crimps earnings and dividends
Dividends could also very well be impacted by this. For instance, mining giants like BHP Group Ltd (ASX: BHP) declare their payouts in US dollars.
The good news is that the impact of the exchange rate won't be material on FY20 results given that the year's just past, but the raging Aussie could be a talking point in the outlook statements.
This is particularly so as currency strategists see further upside for our currency, according to the Australian Financial Review.
What's driving the Australian dollar
To be sure, it isn't strength in the Aussie that's driving the gains. It's weakness in the US dollar as its safe haven status comes under threat.
The rampant COVID-19 pandemic that's still ripping through the US and forcing some states to consider second lockdowns are one factor.
This is making the US Federal Reserve chair Jerome Powell nervous, and if the Fed is worried, investors should be too.
The Fed is trying to keep the US economy afloat by continuing to pull on its quantitative easing (QE) levers. This keeps its financial system well lubricated with cash, but it hurts the value of the US dollar.
Throw in uncertainties caused by the upcoming presidential election and the worst quarterly GDP reading for the US economy ever, and you can see why sentiment is this poor.
A$ heading higher
Currency forecasters are scrambling to revise their estimates for the Aussie given that the headwinds against the US dollar isn't abating.
The AFR reported that most experts weren't expecting the Aussie to trade at US70 cents until the end of 2020.
Westpac Banking Corp (ASX: WBC) is one of the more aggressive forecasters. It was initially predicting the Aussie to hit US72 cents by end of this calendar year but has lifted its forecast to US74 cents.
ASX winners and losers
I suspect currency experts will be expecting the US dollar will continue to weaken into 2021, and that will crimp on earnings for a wide range of ASX stocks.
Some ASX shares with material exposure to the greenback include the Boral Limited (ASX: BLD) share price, Brambles Limited (ASX: BXB) share price and Reliance Worldwide Corporation Ltd (ASX: RWC) share price – just to name a few.
On the flipside, the stronger Aussie will benefit importers, such as retailers. Possible winners are the Nick Scali Limited (ASX: NCK) share price and Reject Shop Ltd (ASX: TRS) share price.
