Investors have many reasons to expect an upbeat reporting season as global growth and the Australian economy are positioned to accelerate into 2018.
But what many have not been paying too much attention to is the rising Australian dollar, which has run up to a near four-month high of US80.5 cents as the Bloomberg Spot Dollar Index tumbled to a three-year low.
The Bloomberg Dollar index measures the US dollar to a basket of major currencies, and there's reason to suspect that the greenback will be on the backfoot for a while yet after the US Treasury Secretary appeared to endorse the weaker US dollar as being good for the world's largest economy.
It is US President Donald Trump's trade protectionist policies that will likely keep downward pressure on the US dollar, and that's why I suspect our dollar will stay above US80 cents for a longer period this time compared to last year.
Exchange rates are very volatile and can move quickly, but if I am right and the Australia dollar stays stubbornly high through February, you can expect the Aussie to make its mark on the upcoming reporting season.
It's the smaller cap stocks that would generally be smiling as they tend to be importers of goods. This of course also assumes they have not hedged the currency and source their products directly from overseas (where they typically have to pay in US dollars) instead of through local agents.
Many specialty retailers like Premier Investments Limited (ASX: PMV), Noni B Limited (ASX: NBL) and Reject Shop Ltd (ASX: TRS) will probably be keeping their fingers crossed that the Aussie will stay on the uptrend.
But other notable retailers like music and electronics chain JB Hi-Fi Limited (ASX: JBH) won't benefit as they buy their products from local wholesalers. This doesn't mean they can't pressure wholesalers to pass on some of the perceived savings, but their leverage to the weakening greenback is limited.
Many large cap industrials though could start to feel the pressure from a stronger-for-longer Aussie. These are companies with large US market exposure and they include market darlings blood products company CSL Limited (ASX: CSL) and sleep disorder treatment device maker ResMed Inc. (CHESS) (ASX: RMD); as well as logistics group Brambles Limited (ASX: BXB) and building products group James Hardie Industries plc (ASX: JHX), just to name a few.
Our outperforming resources companies should also be feeling the heat if not for the fact that commodity prices remain stubbornly high despite of the weakening US dollar. Commodities and the US currency tend to move in opposite directions – but not this time as expectations of a further pick up in global growth is keeping the commodity bulls alive.
However, miners that produce most or all of their minerals in Australia will be more at a disadvantage as their cost base is Australian-dollar denominated while they sell their commodities on a US-dollar basis.
Again, these tend to be the smaller miners such as gold miner Saracen Mineral Holdings Limited (ASX: SAR) and Pilbara-focused Fortescue Metals Group Limited (ASX: FMG) and Atlas Iron Limited (ASX: AGO).
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