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.

AUD
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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This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.