Aussie dollar breaking to new 30-month high will boost these ASX stocks

The Australian dollar surged to a fresh two and a half year high and is at a point that will provide a decent tailwind to some ASX stocks.

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The Australian dollar surged to a fresh two and a half year high and is at a point that will provide a decent tailwind to some ASX stocks.

The Aussie hit US75.33 cents – it’s highest level since June 2018. Some economist believe that the currency will leave a distinct mark on our economy and corporate earnings once it crosses the US75 cent level.

While CSL Limited (ASX: CSL) may have called off clinical trials for its COVID‐19 vaccine, optimism that a successful drug will be available soon is lifting risk appetite.

Why the Australian dollar surged to new highs

Our dollar tends to appreciate when sentiment is positive, and the rebound in China’s economy along with the strong iron ore price completes the trifactor for the Australian dollar.

The Aussie battler has surged around 32% since hitting the lows of around US57 cents in March as the pandemic caused markets to crash. It’s sitting on gains of around 7% this calendar year.

A strong local dollar is not good for our economy as it makes our exports more expensive. But on the flipside, local importers will get a profit boost.

ASX retail stocks the biggest winners

This means the rally in the retail sector may not be over as some, not all, will see margins increase thanks to the exchange rate.

The retailers that benefit most as those that source products directly from overseas and carry their own brands.

ASX stocks best placed to benefit from the exchange rate

UBS noted that those with extensive private label products include the Wesfarmers Ltd (ASX: WES) share price, Premier Investments Limited (ASX: PMV) share price, Super Retail Group Ltd (ASX: SUL) share price and Adairs Ltd (ASX: ADH) share price.

Automotive parts suppliers like the Bapcor Ltd (ASX: BAP) share price and GUD Holdings Limited (ASX: GUD) share price also stand to benefit.

But the broker noted that the positive currency tailwind may be muted by any hedging contracts these companies have in place.

ASX share price correlation to the Australian dollar

What’s interesting is that when USB studied the correlation between share price and currency movements, the Harvey Norman Holdings Limited (ASX: HVN) share price stood out.

Shares in the electronics and furniture retailer generated a 0.25% market-relative return when the AUD/USD rate increased by 1%. If other currencies are factored in, the market-relative return drops to 0.08%.

That may not sound like much, but the Harvey Norman share price is the most sensitive to currency movements of all stocks covered by UBS.

Foolish takeaway

I say that’s interesting because this isn’t what I was expecting. Many of the brands Harvey Norman carries are bought from local distributors. This means Harvey Norman pays in Australian dollars and it’s the distributors that typically wear the currency fluctuations.

But correlation is not causation. There are many factors that can influence share price movements. Something to think about if you are investing solely for the exchange rate.

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Brendon Lau has no position in any of the stocks mentioned. Connect with me on Twitter @brenlau.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends ADAIRS FPO. The Motley Fool Australia owns shares of and has recommended Bapcor, Premier Investments Limited, and Super Retail Group Limited. The Motley Fool Australia owns shares of Wesfarmers Limited. The Motley Fool Australia has recommended ADAIRS FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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