The Aussie looks poised to push to new 28-month highs and that spells bad news for some of the most popular ASX stocks.
Economists are warning that we are approaching a dangerous level. This is where the currency will put a brake on the economy and company earnings, reported the Australian Broadcasting Corporation.
The Australian dollar is hovering close to US74.5 cents currently and experts are predicting it could go higher in 2021.
Some S&P/ASX 200 Index (Index:^AXJO) stocks may have to downgrade their earnings guidance as soon as the March quarter, warned UBS.
Currency headwinds pressuring some ASX stocks
The broker worked out the ASX stocks that are most likely to suffer as it's forecasting the Aussie battler to hit US78 cents by end of 2021 and US82 cents the following year.
"COVID saw large fluctuations in the AUD, with the AUD hitting a low of 0.57 on 23 March," said UBS.
"Since then, as a 'risk-on' currency, the AUD has appreciated 29% as markets have recovered."
Calculating the impact of the Aussie
Working out the direct earnings impact of the Australian dollar-to-US dollar exchange rate is not easy. It's much tricker when you try to link the currency pair to share price movements.
This is because offshore earners are often exposed to other currencies too, such as the Euro or British pound.
Further, share price movements are influenced by a host of other factors, such as market sentiment and outlook.
Cochlear share price most negatively correlated
However, UBS found that two ASX stocks in particular are most vulnerable to a strong Australian dollar.
The first is the Cochlear Limited (ASX: COH) share price. The hearing implant developer generates income in both the US dollar and Euro, but reports in Australian dollars.
The Euro could offset some of the earnings pressure from its US operations, but that may not be enough.
"A 1% increase in the AUD/USD has been associated with a -0.29% market-relative return for Cochlear, accounting for the historical relationships between other currency pairs," explained UBS.
"A 1% increase in the AUD/USD has been associated with a -0.52% market-relative return for Cochlear, not accounting for the relationship between other currency pairs."
Of all the ASX stocks under UBS' coverage, the COH share price is the most sensitive to exchange rates.
CSL share price second most impacted
The second most sensitive stock is the CSL Limited (ASX: CSL) share price. The broker found that a 1% change in the currency pair coincided with a -0.27% market-relative return for the blood products maker, if other currencies are accounted for.
Otherwise, the CSL share price generated a 0.42% market-relative loss if only the AUD/USD rate is accounted for.
