The long-mighty Australian dollar has taken a few knocks in recent weeks and more analysts are starting to consider the possibility that it’s seen its highs for quite some time.
As we’ve seen in the past, when the trend in the Aussie dollar turns, it can be quite dramatic. Back in 2008, for example, the Aussie fell from 97 US cents to 60 US cents within three months.
Therefore the question arises, how can investors best position their portfolios to account for a possible new downtrend in the Aussie?
Investment options
Thankfully, with the listing of US dollar and international equity market exchange-traded funds (ETFs) on the Australian Stock Exchange, investors have a lot more options for taking advantage of currency swings than in earlier years.
Of course, predicting the direction in currencies is hard – especially over the short term. But over a longer time frame, the Australian dollar has clearly moved in broad cycles related to the direction of commodity prices and global economic growth.
That cycle appears to be turning.
The next cycle
Lower local interest rates, China’s slowdown, falling commodity prices, and European-related concerns over global growth have all recently conspired against the Aussie.
Perhaps most importantly, due to rising supply and signs of over capacity in China’s steel industry, Australia’s key coal and iron ore export prices have likely peaked, albeit at historically high levels. The commodity price correction has seen mining stocks tumble over the past year – far harder than the market overall – and this has caused major companies such as BHP Billiton to review their investment plans.
Indeed, while the Australian dollar has broadly moved in line with global growth sentiment in recent years, signs of a more negative trend for the currency have recently become evident – possibly reflecting greater investor concerns over the Chinese economy and commodity prices, and more confidence in America’s economic recovery.
A recent history
Note, the Aussie first broke above parity to the US dollar in late 2010, and reached a high of US$1.10 in late July last year. With last year’s jitters in Europe, the Aussie briefly slumped to 94 US cents in early October, which also coincided with the bottom in global equity markets more generally. Along with the rebound in global equity markets, it then staged a rebound to reach US$1.08 by late February this year.
However, despite America’s S&P 500 index reaching new post-GFC highs earlier this year, the Aussie was not able to push back above $US1.10. In fact, it peaked a month before the US stock market entered its current correction phase in early April.
With the correction in world stock markets in recent weeks, the Aussie broke back below parity two weeks ago.
[1]Three ways to take advantage of a swing
So if the Aussie dollar is headed lower, what can investors do?
For starters, if you’re still bullish on global stock markets – particularly the United States – you could boost exposure to Wall Street through buying a US equity ETF, such as the iShares S&P 500 (ASX :IVV). Note, its management expense ratio (MER) is only nine basis points a year.
Vanguard also has a US equity market ETF (ASX:VTS) with a MER ratio of just six basis points! Both these ETFs are unhedged, meaning their Aussie-dollar value will rise (even with no change in share prices) if the US dollar appreciates against the Aussie.
Investors less sure about the outlook for global equities, but who still want some US dollar exposure, could also consider the BetaShares US dollar ETF (ASX:USD), which effectively invests in US dollar bank deposits on your behalf. Of course, the interest rates on US bank deposits are currently much lower than those available in Australia, but this would be offset by exchange rate gains should the Aussie slump.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Any individual should, before acting, consider the appropriateness of the information in regards to their objectives, financial situation and needs and, if necessary, seek professional advice.
Also in the Switzer Super Report:
- Peter Switzer: The market is at the mercy of wise guys [2]
- Charlie Aitken: The ASX has never been more opaque [3]
- Andrew Bloore: How to use the Age Pension in retirement [4]