Overnight the Federal Reserve raised interest rates in the United States for the second time in 2018. In addition to this, the central bank signalled its intention to raise rates twice more before the end of the year and then three times in 2019.
If the Fed goes ahead with its plans it will have raised interest rates to between 3% and 3.25% by the end of 2019.
With the Reserve Bank of Australia unlikely to raise its own rates until the end of next year at the earliest, I believe the yield differential will weigh heavily on the Australian dollar.
I expect that this could potentially see the local currency fall below the 70 U.S. cents mark again.
I'm not alone in thinking this way. The most recent Westpac Banking Corp (ASX: WBC) Weekly economic report predicts that the Australian dollar will be down to that level by September of next year.
Though it is worth noting that the bank's forecast has been based on the Federal Reserve only raising rates three more times between now and the end of next year. Those additional two hikes, if they come, could see the bank potentially revise its forecast for the Australian dollar even lower.
Incidentally, Westpac hasn't forecast a rate hike from the Reserve Bank of Australia until sometime after March 2020.
How could you profit from this?
There are a couple of ways that investors could look to profit from a weakening Australian dollar.
One way is to invest in companies that generate a good portion of their revenue in the United States, as they are likely to benefit from favourable currency movements. Companies like Appen Ltd (ASX: APX), Aristocrat Leisure Limited (ASX: ALL), and Treasury Wine Estates Ltd (ASX: TWE) tick a lot of boxes for me in this regard.
Another way is to look at shares that could benefit from increasing numbers of tourists into Australia. A weaker local currency is likely to make Australian an even more attractive travel destination. Shares such as Crown Resorts Ltd (ASX: CWN) and Sealink Travel Group Ltd (ASX: SLK) could be worth a closer look.
