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.
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.
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.
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.