Valuation fears are rocking the S&P/ASX 200 Index (Index:^AXJO), but the forecast collapse in the Aussie dollar could give larger ASX shares a reprieve.
ASX 200 shares are hitting new highs even as our largest cities are stuck in lockdowns due to the COVID-19 delta-strain.
This profit reporting season may be tipped to be one of the best we've seen, but markets are forward looking.
It's not FY21 numbers that will keep ASX shares running ahead but the outlook for this financial year.
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ASX 200 shares outlook could be bolstered by A$ weakness
On that front, earnings growth is unlikely to match that of the previous year. Talk about central banks removing excess liquidity in the financial system will also weigh on sentiment.
But the waning Australian dollar could offset some of the headwinds. The Aussie battler has been on the retreat since hitting a high of around US80 cents in February this year. It's currently trading around US73.3 cents.
Australian dollar tipped to crash to US68 cents this year
The Aussie is likely to fall further, according to Exchange Traded Fund (ETF) provider Betashares.
"We are also entering the local earnings season which should confirm an impressive rebound in corporate profits last financial year," said Betashares chief economist David Bassanese.
"One concern, however, is this year's overall Australian earnings growth appears relatively subdued compared to the global outlook, not helped by an anticipated slump in resource sector earnings due to an expected weakening in iron-ore prices.
"What might boost the local earnings outlook, however, is a weaker $A. Indeed, with Australia now lagging in the global COVID recovery and iron-ore prices finally coming back down to earth, one potential vulnerability in the next few months is the $A."
How the A$ will impact on ASX 200 shares
Betashares was forecasting the Aussie to fall to US73 cents by year-end, but it's already hit that level.
Bassanese is now expecting our dollar to break below US70 cents in the next few months, before reaching US68 cents by the end of 2021.
This will make a big difference to ASX 200 shares as most of them have material exposure to US dollar earnings.
Currency tailwinds for some
When they translate their profits back into the Australian dollar, the exchange rate will give earnings a nice boost.
From this perspective, even our iron ore miners like the Rio Tinto Limited (ASX: RIO) share price and Fortescue Metals Group Limited (ASX: FMG) share price could get some relief.
While the iron ore price is retreating from record highs, the softer Aussie helps with translated profits and dividends.
Further, their cost base is largely in Australian dollar, and that could provide an extra buffer for margins.
On the flipside, ASX small caps tend to be net importers. So, the weakening Aussie will put pressure on profits for those who pay for goods in US dollars but sell in Australian dollars.
