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Investors to see benefit in sliding Aussie dollar

Lewis Jackson  |  09 Dec 2021Text size  Decrease  Increase  |  
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The Australian has been on a downward slide but that's good news for many equity investors who stand to gain from the falling currency, according to several economists who spoke with Morningstar.

Since November the Australian dollar is down roughly 5% against the greenback. On Friday, it briefly dipped below 70 US cents, the lowest level in more than a year. The decline is similar when measured against the currencies of eighteen of Australia’s major trading partners, according to data from the Reserve Bank.

While a weaker dollar is bad news for those looking to travel, should investors be concerned? Morningstar spoke with several analysts and economists to understand what’s driving the latest moves in FX markets and why Australian investors stand to benefit.

Dollar squeezed between the US and China for now

The Australian dollar is being pushed lower by two macroeconomic dramas unfolding on either side of the Pacific: the slowdown in the Chinese economy and the rise of inflation in the US.

Trouble in the Chinese economy matters translates into less demand and lower prices for iron ore and other commodities says David Bassanese, chief economist at BetaShares. And when iron ore prices fall, the Aussie dollar tends to follow because minerals and energy are such a significant chunk of exports.

Today, prices for the metal are roughly half the US$200 per/tonne plus they hit in July as the Chinese steel sector cuts production to lower emissions and the property sector battles a debt crisis.

On the other side of the Pacific, markets expect the US Federal Reserve to bring forward rate hikes to head off inflation. That makes the country a more attractive place to stash cash, especially with the Reserve Bank insisting the cash rate will stay flat for years, says Stephen Kirchner, an economist at the University of Sydney. That inflow of money boosts the USD relative to the AUD.

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“There’s a sense among investors that the RBA will lag the tightening process across the G10 economies [a group of developed economies],” says Kirchner. “That sentiment is weighing quite heavily on the AUD now.”

Investors are already moving. Kirchner notes foreign holdings of Australian government bonds have dipped below 50% for the first time in a decade.

Both analysts expect the developments in China and the US to weigh on the dollar for the foreseeable future.

Australian investors to benefit

Broadly speaking, a falling dollar is good news for the Australian share market, says Bassanese.

The reason is the ASX hosts more exporters than importers. When companies doing business overseas bring their dollars home, a falling exchange rate boosts that revenue, all else equal, he says.

“A weaker Aussie dollar tends to be a positive for shareholder earnings.”

Australian biotechnology giant CSL (ASX: CSL) earnt roughly 90% of its revenue overseas last financial year, with almost half from the United States alone. Morningstar equity analyst Shane Ponraj says a falling dollar modestly benefits the firm.

“It’s a tailwind for sure,” he says, “and because they earn most of their revenue offshore it’s more material for them than other companies.”

Roughly 40% of the revenue earnt by companies on the ASX come from overseas as of November, according to Morningstar data.

The impact for the major Australian miners is mixed, says Morningstar direct of equity research Mathew Hodge. Commodities such as iron ore trade in US dollars, so the falling Aussie dollar boosts those revenues. But any gain is partly offset when commodity prices are falling too.

“It matters a little on the translation of US dollar earnings and dividends into Australian dollars,” says Hodge.

More broadly, a falling dollar boosts the overall competitiveness of the export sector. To the degree that the Australian dollar falls relative to the currencies of other exporters, Australian products cheapen.

Sectors like tourism should also see some benefit as a weaker dollar makes Australia a cheaper destination for overseas visitors, says Bassanese.

is a reporter and data journalist with Morningstar. Tweet him @lewjackk or get in touch via email

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