The Australian dollar has surged more than 5 per cent over the last month to buy nearly US 80 cents as the US Fed plays dovish and Australia's Reserve Bank jawbones the Aussie dollar higher in the minutes to its July Monetary Policy Meeting.
The higher Aussie dollar brings little benefit to the local economy as it is less competitive and less attractive to significant overseas investors. For share market investors a higher dollar also means many of the bourse's best companies are likely to face a profit headwind as they earn much of their revenue in U.S. dollars before paying dividends in Australian dollars.
Just over the last month the share prices of big USD earners like packaging business Amcor Limited (ASX: AMC) pallets business Brambles Limited (ASX: BXB), U.S. shopping centre operator Westfield Corp Ltd (ASX: WFD) and healthcare giant CSL Limited (ASX: CSL) have lost between 4 per cent to 9 per cent of their value.
One way to profit from a higher Australian dollar
The price falls in some of the ASX's best international businesses potentially provide an opportunity for investors to buy shares providing they believe that the Australian dollar's recent rise is temporary and that over the next 12-36 months it will edge lower.
Personally, I expect it will trade sideways between US 75 to US 82 cents over the 12-36 months ahead given the differing cash rate outlooks, which means for investors with little U.S. dollar exposure currently now is a good time to buy the the likes of CSL, Amcor, or asset manager Macquarie Group Ltd (ASX: MQG).
A second way to profit from a higher Australian dollar
If you're an investor who thinks many of the ASX's best international businesses are still on rich valuations given their changing earnings outlooks and you believe the local dollar is likely to stay around US 80 cents then it may be best to look overseas for returns.
The easy solution is to take advantage of the higher exchange rate and buy U.S. dollars before investing in the world's strongest and most powerful businesses in the US.
Just this week Facebook Inc. posted another blockbuster quarter of growth, while other tech businesses like Amazon Inc., Shopify, Nvidia or Mercadolibre are widely tipped as having bright futures. That's before you consider the dominant consumer-focused or financial services businesses in the U.S.
Investors could also take advantage of a weak British pound to buy some of the strongest consumer goods companies in the world such as Unilever or GlaxoSmithKline.
Whatever way investors choose it's important that an equity investment portfolio has strong exposure to overseas growth in my opinion, although it remains that company quality and valuation always beat any consideration as to foreign exchange movements.
