The Reserve Bank of Australia kept cash rates on hold today at 1.5%, but fired below's warning shot to investors over the local currency:
"The Australian dollar has appreciated recently, partly reflecting a lower US dollar. The higher exchange rate is expected to contribute to subdued price pressures in the economy. It is also weighing on the outlook for output and employment. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast."
Central bankers all around the world are in a Machiavellian-style battle to keep their own currencies lower in order to boost competitiveness and inflation, while avoiding a Keynesian liquidity trap where monetary policy via lower rates fails to stimulate demand as intended.
While the U.S. Federal Reserve chair Janet Yellen spent much of July talking down the U.S. dollar and timeline for rate hikes, the RBA chose to talk the Australian dollar higher in its July 18 minutes to its monetary policy meeting.
Consequently, the Aussie dollar has recently advanced 4% on the greenback, which means many of the share market's leading companies are facing potential profit holes over FY 2018.
Analysts will also be adjusting forecast medium-term currency rates in their discounted stock valuation models that means U.S. dollar earners like Woodside Petroleum Limited (ASX: WPL), CSL Limited (ASX: CSL) Amcor Limited (ASX: AMC) and QBE Insurance Group Ltd (ASX: QBE) are all coming under valuation pressure.
For investors the question is whether the Australian dollar will revert lower most likely as the U.S. Federal Reserve lets on that investors are underestimating the proximity of further cash rate hikes.
If this is the case now may be a good time to buy high-quality U.S. dollar exposed stocks like CSL, especially for investors with little exposure to the stronger US dollar currently.
