When the Federal Reserve raised its interest rate on Wednesday it also signalled three more potential hikes next year. This caused the U.S. dollar to strengthen and the Australian dollar to crumble. At present the local currency has dropped all the way down to around 73.5 U.S. cents.
But in my opinion this could be the start of much larger declines to come, especially if Australia loses its AAA credit rating next week.
Companies such as Treasury Wine Estates Ltd (ASX: TWE), Catapult Group International Ltd (ASX: CAT), and Ardent Leisure Group (ASX: AAD) will no doubt be smiling. These companies derive a significant portion of their revenue from the United States.
But not all companies will be happy to see the Australian dollar drop lower. These three in particular could find a weaker currency a challenge:
Nick Scali Limited (ASX: NCK)
This furniture retailer is one of my favourite shares on the ASX. But unfortunately I would recommend investors consider selling its shares if the Australian dollar drops significantly. The majority of Nick Scali's inventory purchases are denominated in U.S. dollars. Although the company does hedge against currency drops, there's only so long a company can do this for. Eventually the company will either have to pass the costs onto the consumer and risk a drop in sales, or take a hit to its margins.
Reject Shop Ltd (ASX: TRS)
This discount retailer is another company that I believe will struggle with a weaker currency. In FY 2016 the company's gross margin fell from 44.5% to 43.7%. Management pointed to the drop in the AUD/USD exchange rate as a key reason behind the fall. As the company operates on razor thin profit margins already, I feel Reject Shop is likely to struggle to maintain its everyday low prices if the local currency weakens. This could lead to it losing further market share to German giant ALDI.
Shaver Shop Group Ltd (ASX: SSG)
According to its prospectus a number of Shaver Shop's key suppliers are based in the United States. Whilst in the past the company has stated that its suppliers generally absorb these exchange rate fluctuations, it acknowledges that this is not guaranteed to be the case in the future. As a result it has warned that it could reduce the company's profitability and ability to pay dividends. If I were a shareholder I would keep a close eye on its margins should the Australian dollar fall.
