It may not be much of a big deal on the surface for the average Australian, but currency fluctuations do have a big impact when it comes to ASX investing, especially for Qantas Airways Limited (ASX: QAN) shares.
Over 2022 thus far, the Australian dollar has plunged in value. At the start of this year, one Aussie dollar was buying around 73 US cents. In early April, it was buying 76 cents.
But today, one local dollar only buys just under 65 US cents.
Such a dramatic fall of our currency against the greenback has many consequences, especially for some ASX shares.
When our dollar weakens against the US dollar, it means that, generally, imports become more expensive, while exports become cheaper. If an Australian tourist wishes to travel to America, a weaker dollar means more of our dollars need to be spent acquiring US dollars. Conversely, it is now cheaper for an American tourist to travel here as their dollars now buy more of ours.
So the most obvious beneficiaries of a lower Aussie dollar are the big miners. These companies can now sell their US-priced commodities at a higher currency-adjusted price than earlier this year, since buyers have to pay for iron ore, oil and gold, amongst others, in US dollars.
But what about Qantas shares?
How are Qantas shares impacted by a low Aussie dollar?
Well, the airline is a hard one to work out when it comes to currency. One might think that a lower Aussie dollar could boost incoming tourism to Australia, which would probably benefit Qantas.
But Qantas is likely to be a net loser from a low Aussie dollar, rather than a winner. For one, Australians might reconsider an international holiday, since our dollars don't stretch as far. Suddenly, the Gold Coast or Byron Bay seems a lot more attractive than Los Angeles or New York than it did a year ago.
But Qantas' primary concern with a low dollar is probably something more fundamental: oil.
Oil, in the form of jet fuel, is Qantas' largest fixed cost. You need a lot of it to get a plane from one country to another. And fuel has to be paid for in US dollars. This means a weaker Australian dollar buys less fuel than it did at the start of the year.
According to reporting in the Australian Financial Review (AFR) this week, this is such a large consideration for Qantas that broker JPMorgan predicts that a US 5 cent rise in the value of the US dollar against the Aussie would boost Qantas' earnings per share (EPS) by 7%. That's more than any other ASX 200 share.
Luckily for Qantas, JPMorgan's currency strategists are reportedly predicting that the Australian dollar will "claw back steep declines in 2022 over the September quarter, before climbing further to US70¢ ($1.11) by the June quarter of 2023".
That would indeed be good news for Qantas shares.
