Leading broker Morgan Stanley has recommended selling the Australian dollar as a top trade for 2018. The broker believes the RBA will hold interest rates in 2018 as the Australian economy faces difficulties from a housing slowdown and weak consumer spending will prevent it from joining other central banks in tightening monetary policy.
Fed to raise?
The Federal Reserve is expected to raise rates for the third time this year later, with the market expecting a 25 basis points increase to bring the cash rate to 1.5%.
This would bring the U.S. cash rate in line with Australia's current rate at 1.50%. The carry trade has seen international investors buy Australian assets for yield, but with rising rates in the U.S., the yield advantage enjoyed by Australian assets won't be enough to appease international investors and would weaken demand for the Australian Dollar.
For Australian equities investors there are a number of ways to play a weaker Australian dollar.
Investors can apply to one of the international brokers that allow Australian residents to purchase U.S. equities directly. The bull market in U.S. equities has shown no signs of ending yet, with the Dow Jones and S&P 500 reaching new all time highs in the overnight session. U.S. markets can offer Australian investors a level of diversification that is not available on the local market.
ASX Beneficiaries
The other way to play a depreciating Australian dollar is to invest in companies listed on the ASX with significant U.S. dollar earnings.
Companies in the healthcare space such as CSL Limited (ASX: CSL) and ResMed Inc. (CHESS) (ASX: RMD) will increase their profits from a depreciating Australian Dollar.
ASX shareholders of ResMed also benefit from a declining Australian dollar as the company's ASX listing is a 1/10th interest in the NYSE scrip where the stock has its primary listing.
Over the last 3 months, ASX shareholders of ResMed have enjoyed a 12.59% increase in their shares because of the recent fall of the Australian dollar compared to holders of the NYSE scrip who have only seen a 8.34% gain. Companies in the technology sector such as Altium Limited (ASX: ALU) and Integrated Research Limited (ASX: IRI) will also benefit from a weaker dollar as they earn approximately 48% and 71% of their revenues in the Americas region.
