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Why the Australian dollar may be set to surge and how it will impact on ASX shares

The suggestion that the booming jobs market is linked to border closures could see the Aussie surge higher. Here’s why…
The post Why the Australian dollar may be set to surge and how it will impact on ASX shares appeared first on The Motley Fool Australia. –

The shock move by the Reserve Bank of Australia (RBA) chief to link migration to wages could set the scene for the Aussie to race higher.

ASX investors should pay attention. This development isn’t only relevant to currency traders looking to make a buck from betting on exchange rates.

RBA Governor Philip Lowe’s comments about how COVID-19 border closures are supporting a jobs boom took many by surprise.

Are investors underestimating the Australian dollar?

This is the first time in living memory that any RBA boss has made this connection, reported the Australian Financial Review.  

This is a big deal because it could indicate that the market is underestimating the Aussie battler. The Australian dollar is trading near its lowest level in 2021 at around US74.9 cents as traders believe the US Federal Reserve will lift interest rates before the RBA.

Dr Lowe reiterated the central bank’s view that the cash rate will not rise until 2024 when the Fed is tipped to lift theirs the year before.

Shuttered borders fuel the Aussie dollar rebound

But if the lack of skilled migrants does drive up wages, it will force the hand of the RBA to lift rates much sooner than expected.

Hints of this inflationary pressure will probably start to show in a few short months. This, combined with the belief that net migration will not return to pre-COVID levels for many years, will be enough to lure the Aussie bulls out from cover.

I won’t be surprised to see the Australian dollar running up towards US80 cents!

How the exchange rate will impact on ASX shares

This will create a headwind for the S&P/ASX 200 Index (Index:^AXJO) on two key levels. Most of the larger ASX shares sell products and services in US dollars. The stronger Aussie will reduce their profits when earnings are converted into the local currency. And lower earnings mean less dividends too!

The second point of friction is the inverse relationship between interest rates and ASX share valuations. In general terms, rising rates reduces the appeal of shares to investors.

Big Australia may have little impact on wage growth

But it isn’t all bad news. While Dr Lowe sees the link between the lack of migration and wage increases, not all economists agree.

They believe that wage pressure stems more from loose monetary policy and government stimulus than border closures.

And here’s the rub. Experts do not know how much of our labour tightness is due to fiscal and monetary policies and how much is due to migration.

How lack of migrants will hurt our economy instead

Goldman Sachs economist Andrew Boak thinks migration is only a marginal factor in the inflation debate, reported the AFR.

“At an aggregate level we see only modest upward pressure on wages given most industries have little reliance on migrant workers,” said Boak.

“Moreover, industries that produce goods and services typically demanded by temporary visa holders – for example education services and accommodation services – are likely to experience headwinds to demand and wages growth so long as international borders remain shut.”

Foolish takeaway

This leads me to the final point – while ASX investors should be conscious about what’s happening to the Aussie dollar, they shouldn’t base their investment decision based on where they think the exchange rate is going.

Not even the experts seem to know. What hope in heaven do the rest of us have?

The post Why the Australian dollar may be set to surge and how it will impact on ASX shares appeared first on The Motley Fool Australia.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. Connect with me on Twitter @brenlau.

The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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