Currency implications on your ASX shares can get confusing.
One such example is if you hold stocks for mining companies.
Many of those operate in Australia but sell the commodities in US dollars, because that's the de facto currency of the global resources market.
Traditionally, the thinking is that a strong US dollar is favourable for investors of businesses like that.
The idea is that costs are spent in the lower Australian dollar, therefore minimising expenses — then the income is maximised as customers pay in the higher US dollar.
"In simple terms, a higher Australian dollar hurts exporters and companies that make money offshore while benefiting importers that end up paying less for their purchases," said Finder expert Prashant Mehra in a blog post.
However, one expert recently disagreed with this theory.
No, a weaker US dollar is better for ASX miners
Shaw and Partners portfolio manager James Gerrish told a Market Matters Q&A that the equation is not that simple.
In fact, he believes the opposite of the conventional wisdom actually applies to local resource producers.
"It's more a case of a weak US dollar is bullish for commodities as opposed to a strong Australian dollar, although they usually go hand in hand," he said.
"The likes of crude oil, copper, gold etc are all priced, bought and sold in US dollars — hence a weaker greenback helps drive up the prices of these resources in US dollar terms."
So when this happens, ASX-listed mining companies reap higher revenue, which "usually more than outstrips the accompanying strength in the Australian dollar".
"But, of course, this may not always be the case."
Classic example is right now
Gerrish took Thursday last week as a "classic" example.
That night US inflation figures came in lower than market expectations, sending the US dollar weaker.
"The Australian dollar roared back above 66 US cents helped by a weak greenback, the commodities surged higher — e.g. gold up US$40/oz," he said.
"While the S&P/ASX 200 Index (ASX: XJO) was trading up +2.7% at 11am, many resource heavyweights outperformed — e.g. Fortescue Metals Group Limited (ASX: FMG) +5%, Sandfire Resources Ltd (ASX: SFR) +6.3%, Evolution Mining Ltd (ASX: EVN) +6.6% and BHP Group Ltd (ASX: BHP) +3.5%."
Gerrish's team, therefore, likes the current conditions for resources and is overweight in the sector.
