The Australian dollar is expected to surge in the current half and that will create winners and losers among ASX shares.
The Aussie battler spent most of the first half of 2021 stuck between US76 and US78 cents. But several experts believe it's set to breakout and test the US80 cent mark.
If our dollar does reach the psychologically important US80 cent-mark, it is unlikely to stop there. And the dramatic rise the currency will have far reaching implications for the S&P/ASX 200 Index (Index:^AXJO).
What's holding the Australian dollar back?
The only caveat is that forecasting currency movements is one of the most challenging tasks for experts. Nonetheless, those who spoke with the Australian Financial Review believe the Aussie is significantly undervalued.
Their optimism is based on surging commodity prices. This usually lifts the Aussie, but Australia's slow rollout of mass COVID-19 vaccinations has been blamed for our dollar's underperformance.
Economic activity in other developed nations that have vaccinated a large proportion of their population have recovered strongly, according to Commonwealth Bank of Australia (ASX: CBA).
"The Aussie dollar has been range-trading around US77.5¢ for quite some time. A headwind has been the slow vaccination rollout compared to other developed economies," the AFR quoted CBA's currency strategist Kim Mundy.
"There was a very quick rollout in the US, UK and eurozone whereas Australia has really lagged, so that explains why the dollar has been stuck recently."
Why the Aussie could surge past US80 cents in 2H21
But the Aussie will soon play catch-up with fundamentals. The bank is tipping the exchange rate to hit US83 cents by end of September before easing back to US81 cents by end of the calendar year as some of the steam comes out of the commodities supercycle.
CBA isn't the only bank with a bullish Aussie dollar forecast. The National Australia Bank Ltd. (ASX: NAB) also believes that the Aussie will test US80 cents in the near-term before spending the latter half of 2021 above that level.
ASX shares that are negatively affected by the rising Aussie
A big rally in our dollar will weigh on a number of ASX 200 shares. Citigroup highlighted the Treasury Wine Estates Ltd (ASX: TWE) share price, Computershare Ltd (ASX: CPU) share price, Champion Iron Ltd (ASX: CIA) share price and Pilbara Minerals Ltd (ASX: PLS) share price as being negatively correlated to the rising Aussie.
It's not all bad news though. The stronger Aussie could actually keep the ASX bull market going as it will dampen the effects of inflation.
Benefits of a strong exchange rate
The fear of rising prices is causing global equity markets to sputter. A stronger currency means that prices may not need to increase quite as fast here as we get a bigger bang for our buck.
Of course, ASX shares that import goods and pay in US dollars will also benefit from any re-rating in the Aussie dollar. These are mostly ASX small cap shares.
The key point here is that a surging Australian dollar in itself doesn't necessarily spell gloom and doom for our bull market. But astute investors always have an eye on the exchange rate as this could affect their share allocation decision.
