The golden run in the Australian dollar may be over and that could have implications for a number of ASX shares.
The Aussie crashed to around US57 cents during the height of the COVID-19 mayhem in March 2020 but came roaring back.
It peaked at just under US80 cents in February this year before easing back to just over US76 cents.
Australian dollar past its prime
The Aussie battler is unlikely to be testing new highs anytime soon. It’s even tipped to weaken further, according to JPMorgan.
The broker looked at the forward curves (the future pricing of the Australian dollar against the US dollar). The Aussie is predicted to average at US75 cents this year before returning to US76 cents in 2022.
The new 2021 estimate is 0.8% below the previous forecast and the 2022 estimate is 2.5% below earlier expectations.
This may not sound like much to you, but it can have a material impact on ASX shares with large US dollar exposure.
How the exchange rate affects ASX shares
However, the impact of the weakening Aussie against the greenback is offset by its expected strength against the Euro.
Many S&P/ASX 200 Index (Index:^AXJO) shares with US operations also sell products into the EU. Some examples include the Cochlear Limited (ASX: COH) share price and Ansell Limited (ASX: ANN) share price.
Meanwhile, ASX shares like the Ramsay Health Care Limited Fully Paid Ord. Shrs (ASX: RHC) share price have greater leverage to the Euro.
Balancing act limits earnings impact
“The decline in the expected A$ and NZ$ relative to the US$ had a positive earnings impact on companies with offshore earnings reporting in local currency, but the benefit was offset for most by an opposite move in the Euro,” said JPMorgan.
“For the USD-reporting companies the stronger US$ had a negative impact on our forecasts, but our spot valuations were supported by a 2¢ drop in the A$.”
What this means is that the currency impact is modest for just about every ASX share under the broker’s coverage. But there is an exception.
Biggest winner from a weaker Aussie
This is the Nanosonics Ltd. (ASX: NAN) share price as its sales are especially weighted to the US.
JPMorgan upgraded its earnings per share (EPS) forecast on the medical equipment disinfection company by 3.7% and 6.2% for FY21 and FY22, respectively.
However, the brighter earnings outlook for Nanosonics wasn’t enough to convince JPMorgan to upgrade its recommendation on the shares.
The broker is sticking to its “neutral” call on the Nanosonics share price but upped its price target by 10 cents to $5.40 a share.
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Brendon Lau owns shares of Ansell Ltd. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Cochlear Ltd. and Nanosonics Limited. The Motley Fool Australia has recommended Ansell Ltd., Cochlear Ltd., Nanosonics Limited, and Ramsay Health Care Limited. 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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