Newfound Aussie dollar strength risk to equities

After dipping to the $0.6940 level on 29 September, the Aussie dollar has now rallied up to the $0.7272 level – its highest level since it touched $0.7280 in the wake of the Fed’s September meeting.

Source: Bloomberg

With US data now looking weaker than many had expected, markets are now pricing in March 2016 as the most likely time for the first rate hike by the Fed. This looks likely to quell some of the US dollar strength in the near term, boosting a range of currencies but also helping commodities that are priced in US dollars.

This could be a boost to Australian exports. The most recent flurry of Chinese PMIs have also improved the very negative outlook on the Chinese economy and it is hoped that the significant monetary easing and fiscal spending this year will improve China’s activity data in Q4.

All these factors have been supportive to Aussie dollar strength, and the most recent Reserve Bank of Australia (RBA) statement severely knocked back the probability of a rate cut in 2015.

We are then left with the possibility of the Australian dollar spending much of the rest of 2015 trading in a $0.70-$0.75 range, which is quite a bit higher than most had previously expected.

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This could mean a significant re-evaluation of the investment case for USD-earners listed on the ASX. Investing in companies with US dollar earnings has been a very profitable trade over the past 18 months, and with expectations for the AUD to weaken to $0.65-$0.67, that looked likely to continue.

However, if this thesis looks to have changed, then unforeseen AUD strength could prove a significant headwind to companies with large US dollar earnings. Here is a list of potentially affected companies and the percentage of their FY15 revenues that came from North American:

Annsel (ANN) 43.1%

Macquarie Group (MQG) 38.8%

Brambles (BXB) 48.7%

James Hardie (JHX) 74.7%

Sims Metal Management (SGM) 54.2%

Breville (BRG) 38.5%

Nufarm (NUF) 47.3%

Treasury Wines Estate (TWE) 41.3%

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