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Forecast double-digit surge in Aussie dollar could put brakes on ASX rally in 2021

Investors who have yet to factor the Australian dollar into their ASX investment decisions should pay heed.
The post Forecast double-digit surge in Aussie dollar could put brakes on ASX rally in 2021 appeared first on The Motley Fool Australia. –

Australian and US currency

Investors who have yet to factor the Australian dollar into their ASX investment decisions should pay heed.

The Aussie dollar is poised to exit the year on a 30-month high and experts believe it could rally another 12% to hit 85 US cents in 2021.

I am expecting a lot more stocks on the S&P/ASX 200 Index (Index:^AXJO) to talk about the exchange rate headwind at the February reporting season. The Aussie puts a handbrake on earnings.

Lucky Aussie dollar not lucky for some

Currency strategists are struggling to keep up with our rallying dollar, reported the Australian Financial Review.

We are the lucky country, but it’s this “luck” that’s likely to inflict earnings pain on many large cap stocks. Around a third of ASX stocks on the top 200 index have material exposure to currency movements, especially from the Australian-US dollar pair.

The Aussie battler is racing higher as our economy is outperforming, thanks to our ability to control the COVID‐19 outbreak.

Aussie dollar could hit 90 US cents

Australia’s rebound from COVID surprised everyone. The federal government recently upgraded their GDP growth forecast to 0.75% for 2020 compared to earlier predictions of a contraction.

What’s more, the outlook for 2021 is looking bright. Consumer confidence is strong, employment conditions are buoyant and the commodity price boom is re-filling the government’s depleted coffers faster than expected.

National Australia Bank Ltd. (ASX: NAB) thinks a move towards US90 cents is not out of the question even though their official forecast is for 80-85 US cents, reported the AFR.

Other factors driving the Aussie higher

It doesn’t help that the US dollar is expected to stay on a back-foot for 2021 either. The country needs another massive stimulus injection to help it stay ahead of the COVID economic shock. This spells bad news for the greenback.

Also, the expected rebound in global GDP as vaccines are rolled out will prompt investors to dump safe haven assets, like the US dollar, for growth assets like the Aussie.

Outperforming ASX stocks impacted by the Aussie

The higher Australian dollar will impinge on overseas income when translated back into the local currency here.

Several large cap ASX stocks that have outperformed in 2020 might find it harder to maintain momentum in the new year due to this.

Examples include the James Hardie Industries plc (ASX: JHX) share price, the Resmed CDI (ASX: RMD) share price and Breville Group Ltd (ASX: BRG) share price.

On the flipside, ASX stocks that import goods from overseas and pay in US dollars will benefit. These include the Wesfarmers Ltd (ASX: WES) share price and Premier Investments Limited (ASX: PMV) share price.

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Motley Fool contributor Brendon Lau owns shares of Breville Group Ltd, James Hardie Industries plc, and National Australia Bank Limited. Connect with me on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Premier Investments Limited. The Motley Fool Australia owns shares of Wesfarmers Limited. The Motley Fool Australia has recommended ResMed Inc. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post Forecast double-digit surge in Aussie dollar could put brakes on ASX rally in 2021 appeared first on The Motley Fool Australia.

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