For over a year now, investment commentary related to the Australian share market and currency has focussed on the theme of the declining Australian dollar relative to its major counterparts, in particular, the US dollar.
However, since mid-January, the Australian dollar has climbed over 8% against the US dollar. Some strategists often point out that our somewhat volatile dollar is prone to overshooting both on the upside and the downside, meaning the currency could have further to climb. So if the Australian dollar continues to appreciate, which stocks are best placed to benefit?
Flight Centre Limited Travel Group Ltd (ASX: FLT) is often flagged as a beneficiary of a rising Australian dollar, as the increased value of our currency improves the spending power of Australian tourists overseas. Even if the jump in the dollar proves temporary, a brief period of strength could be enough to bring forward travellers' decisions about international travel so as to "lock in" better prices and currency benefits for travel later in the year.
In addition, retailers who import a significant amount of inventory are obvious beneficiaries of a stronger purchasing currency. Reject Shop Ltd (ASX: TRS) has managed a 40% rise in its share price on the back of better like-for-like store sales and operational improvements. A 10% or more benefit to its foreign exchange could provide a further tailwind and result in better margins for the business.
Fantastic Holdings Limited (ASX: FAN) which owns and operates 72 Fantastic Furniture stores across Australia, along with approximately 50 more stores under the Plush, Le Cornu and Original Mattress Factory brands, is another retail beneficiary of a climbing dollar.
While the company cleverly focuses on a select few products in its range that are manufactured in Australia in its advertising, a large proportion of the total product offering is sourced from low-cost manufacturing hubs overseas. This helps keeps the cost of goods down, and allows the company to reinvest savings into keeping prices lower for its value conscious customer base.
Qantas Airways Limited (ASX: QAN) continues to be the winner from a range of macroeconomic conditions. The lower oil price, and subsequently, the lower aviation fuel price, have seen company profits skyrocket in recent times. A stronger Australian dollar also lowers the effective purchasing price of aviation fuel (which is denominated in US dollars), although the benefits may be limited due to the company policy of hedging its purchases for forward periods.
Foolish takeaway
It might be too early to invest in companies based on a stronger dollar, but to make market-beating gains, it will definitely pay to identify those businesses early that are well placed to benefit if the current appreciation in the currency becomes a clear trend.
