Do Fluctuations in the AUS $ Impact Local Markets?

How?

• At a macro level, a strong Australian dollar threatens to make overseas investor nervous. If they invest in the Australian market when the dollar is high relative to their local currency, they get less for their money.  If they were purchasing when the dollar was weaker against their local currency they would have received a greater return.

For example:

• John lives in the U.S. and wants to buy 1,500 ANZ shares on the ASX at $31.
• At the time of purchase, 1 USD will buy 0.90 AUS, therefore, his ANZ shares will cost him USD $51,150, instead of AUD $46,500.
• If the USD strengthens against the AUD so each currency is worth the same, but John then decides to sell his shares and return the money back to the U.S, he would only receive $46,500.
• John would lose 10% of his money.

The example here shows why a foreign investor may be nervous about investing in the Australian market while the Australian dollar is at a perceived high. The question overseas investors are asking, is ’where will the AUD settle?’

• A number of Australian companies generate significant earnings overseas; therefore, when they bring their earnings back to report in AUD, a strong dollar can weaken their earnings. On the reverse, if the Australian dollar weakens they can receive an automatic injection to their bottom line.

For example:

• QBE is a company that Hewison Private Wealth has recommended for many years.
• We have said for some time now that a current attribute of QBE lies in the fact 80% of its earnings are generated offshore.
• The AUD has recently slipped from highs of USD 1.10, to 0.98 following the RBA’s gradual easing of the monetary policy. YTD, QBE has risen 41%, without any significant positive announcements to support the rise.

Ultimately, the long term performance of a company will determine whether it performs or not.  However, in the short term there can be other factors at play that will significantly affect share prices and it’s important to have the knowledge of these incidences, or at least consult someone who does.

If you would like to discuss this in more detail please contact your Adviser on 9682 1900.