At the start of this trading week, the Australian dollar was sitting at a level not seen in more than a year. In fact, you would have to go back to July last year to find the Aussie dollar trading below 70 cents, as it was earlier this week.

While the currency has since pared some of its recent losses, a number of the key themes weighing on the local currency still remain in play. For investors, this means there are key considerations to make when investing in shares with exposure to the AUD/USD exchange rate. A weaker Australian dollar weighs on businesses that import goods into Australia, but shares with exposure to the US dollar, such as those that typically earn in USD or report in US dollars, often stand to benefit.

With this in mind, let’s take a look at some of the key themes in a weak AUD environment.


AUD headwinds

A number of headwinds have been dragging on the Australian dollar recently.

First, there have been growing concerns around economic growth out of China, with the AUD often seen as a proxy trade given Australia is so heavily dependent on China for trade. A growing number of economists see economic growth as China’s biggest challenge in 2022. Geopolitical tension is on the rise with the US and Australia, among others. COVID restrictions continue to dampen consumer consumption. Exports have been weakening. And stress in the Chinese property sector is still manifesting. That has led to expectations Beijing may settle on a 2022 growth target that is lower than that set for this year.

Secondly, the emergence of the Omicron variant has reminded investors that the market is still susceptible to bouts of volatility caused by a pandemic that is far from over. With the AUD often viewed as a risk-sensitive currency, any further weakness across markets due to pandemic uncertainty has the potential to move sentiment for the AUD as well.

And thirdly, monetary policy remains a key issue for the local currency, with the US Federal Reserve moving closer towards the prospect of an accelerated timeline on unwinding its QE program, and potentially its first interest rate hike. Meanwhile, the RBA has expressed more caution in following suit, with the rhetoric suggesting interest rates are on hold until inflation is sustainably within the central bank’s 2-3% target range.


Currency hedging and reporting

For companies that generate revenue in US dollars, or in fact report their results in USD, the upside comes from when this is converted back into a weaker Australian dollar. That is, at reporting time, the converted result is higher than it would have been if the Aussie dollar had not declined.

This helps explain why you will sometimes see assumptions within a company’s guidance outlook, where they will specify an expected range or figure for the AUD/USD currency pair across the coming period. The intention of this statement is to ‘normalise’ the impact of any currency movements, albeit this can lead to a shortfall (or surplus) in potential gains that may have been possible were the company’s operations not currency-hedged.

One other thing to keep in mind is that companies reporting in USD will often declare their dividends in that same currency, providing some potential upside when investing in shares leveraged to the greenback.



Shares that benefit from a lower AUD/USD

Some of Australia’s most well-known names are beneficiaries of a weaker Aussie dollar. When you consider that Australia’s economy is particularly dependent on exports, this should begin to make more sense, but there are also a number of ‘offshore earners’.


Commodity exporters

A weaker AUD is beneficial to commodity exporters as it ensures they remain competitive across a global marketplace, particularly against the likes of Brazil and other countries. At the same time, currency exchange gains are made when USD exports are converted back into AUD.

The iron ore miners often lead the way in this discussion, with BHP Group (ASX: BHP), Rio Tinto (ASX: RIO), Fortescue Metals Group (ASX: FMG) and Mineral Resources (ASX: MIN) all earning revenue from iron ore shipments that are priced in USD. With the greenback remaining strong against the Aussie dollar, their earnings receive a shot in the arm come reporting time.

Gold producers Newcrest Mining (ASX: NCM) and Northern Star Resources (ASX: NST), as well as energy names Santos (ASX: STO) and Woodside Petroleum (ASX: WPL) are in a similar position, with the price of gold and oil benchmarked in US dollars, meaning far greater revenue when translated into Australian dollars.


Offshore earners

Beyond exporters, some investors opt to turn towards companies that have operations in overseas jurisdictions, where they earn USD and stand to benefit from the weaker Aussie dollar. The healthcare sector is one area that often comes to mind when weighing up the idea of investing in shares that benefit from a soft AUD.

ASX-listed companies like CSL (ASX: CSL), Cochlear (ASX: COH), Ramsay Healthcare (ASX: RHC) and ResMed (ASX: RMD) have operations all around the world, earning a large chunk of their income overseas. In particular, ResMed is dual-listed both on the ASX and NYSE, but with foreign exchange movements favouring the USD, investing in locally-listed RMD shares over the last six months would have delivered significantly greater gains for investors than the NYSE version.

It’s not just healthcare stocks that benefit, however, as the manufacturing space is also a prime beneficiary. Altium (ASX: ALU), as well as materials businesses like Bluescope Steel (ASX: BSL), Brambles (ASX: BXB), Boral (ASX: BLD), James Hardie (ASX: JHX) and Amcor (ASX: AMC) are among those leveraged to a strong greenback, especially due to the large volume of sales they generate within North America. And where local manufacturers sell in AUD, the weaker currency means they can sell more products both home and abroad.


Tourism and leisure operators

While this might be a hard space to imagine of late amid the COVID restrictions that have prevented international tourism, the theme may come to light in the coming weeks as borders finally reopen. On this point, a weaker Aussie dollar means that holidays to Australia become relatively cheaper for international tourists. Tourism and leisure stocks exposed to this trend include Crown Resorts (ASX: CWN), Star Entertainment Group (ASX: SGP), Sydney Airport (ASX: SYD), and Ardent Leisure Group (ASX: ALG).



What else to consider before investing in shares leveraged to the AUD/USD

Although companies with exposure to a strong USD stand to benefit from FX gains, investing in shares solely because of this premise is an unwise approach. That’s because there are broader implications that relate to each individual business and their fundamentals. Considerations might include things like debt levels, which can often be denominated in USD, as well as free cash flow, margins and other key criteria. At the end of the day, if revenue is materially lower, a weaker Aussie dollar can only help so much.

In this respect, regardless how certain companies may see their operations benefit from a currency tailwind, one should always give appropriate consideration to the macro backdrop. While investing in shares with exposure to the AUD/USD can provide your portfolio with some hedging protection, your due diligence needs to be as meticulous as ever.

You must also consider at what point in the foreign exchange ‘cycle’ you are investing. If the AUD/USD rate rallies, even sharply in a short period of time, the above names stand to face headwinds just as easily as they benefit at this point in time from a lower AUD. In that case, a rising AUD may make it more attractive to invest in US-listed stocks where you have greater purchasing power, with names like Apple (NASDAQ: AAPL), Tesla (NASDAQ: TSLA) and Microsoft (NASDAQ: MSFT) among the most-popular trades.


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