Last week's interest rate cut is so far having the desired effect that the Reserve Bank of Australia (RBA) was looking for. That is, the Australian dollar (AUD) is weakening. With the AUD now trading near parity with the US dollar, it's time for investors to consider how this will affect individual companies.
A fall in the exchange rate affects businesses in different ways; in many cases there may be positives and negatives. For example, importers such as department store David Jones (ASX: DJS) have benefited from a strong AUD, which has made importing merchandise cheaper. On the flip side, the department stores have faced fierce competition from offshore retailers whose products have been relatively cheaper. This has played out through consumers purchasing goods online from overseas stores and also through increased overseas travel. So the "pro" for departments stores is that foreign competition may decrease, however it's doubtful this will outweigh the "con" of higher merchandise import costs.
Exporters, on the other hand, can be winners from a weaker AUD but there is an exception. While in theory resource companies such as Fortescue Metal Group (ASX: FMG) should become more competitive with a lower AUD, in reality the slackening in the exchange rate is in part the result of commodity price weakness, potentially cancelling out any benefits.
So who benefits?
It really is a case-by-case analysis. Companies with significant global operations but not exposed to hard commodities are well placed. This includes companies such as CSL (ASX: CSL) and Resmed (ASX: RMD). Likewise, primary producers such as Australian Agricultural (ASX: AAC) benefit from an increase in export price competitiveness. Third, import-competing domestic producers such as BlueScope Steel (ASX: BSL) gain from overseas competitor products becoming relatively more expensive to import.
Foolish takeaway
With slowing domestic growth and high input costs, a weaker exchange rate may provide just the boost needed to improve the outlook for a number of companies.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.
