FIIG - The Fixed Income Experts

News and Education

Australian dollar heading for 68-75c versus the US dollar?

by Craig Swanger | Oct 21, 2014

Over the past month we have written a series of articles on strategies to protect your overall investment portfolio and how to profit from a falling Australian dollar (AUD).

If history is any indicator, the AUD could be heading for 68-75 cents against the increasingly strong US Dollar (USD). To view the following articles: "High yield USD portfolio earning 7.2%"  please click here and "Australian Dollar doldrums - how to use bonds to profit from a falling Aussie dollar and earn 3-4% p.a." click here.

Our analysis of the performance of the USD against its major trading partners’ currencies shows a clear pattern: there have been three periods in which the US economy has led the world economy out of an economic slowdown: 1983-85; 1991-93; and 1998-01, as shown in the blue bars below. 

Each of those periods has marked the start of a bull run for the USD, as you would expect. Less intuitive is the fact that the USD has risen each time far more against the AUD than its other partners. These periods have seen the AUD fall an average of 35%. From its recent peaks, that would result in an AUD/USD exchange rate of 71 cents. 

 Should you believe that history is repeating itself and this is the start of a prolonged period of AUD weakness, there are three strategies for profiting from this scenario:

1: Invest in the USD

The simplest way to profit is to be “long USD”, that is have a direct exposure to US Dollars. You can do this through a US bank account (very low interest); US shares unhedged (subject to rule 3 below); or USD denominated corporate bonds. The latter strategy has been one our clients have been successfully using for some time with yields of 2-10% p.a. on top of the 8.3% rise in the USD in the last 12 months.  This is also a strong hedge against the likelihood of falling equity returns when the global economy is slow. The table at the end of the article highlights some of the most commonly traded USD bonds by our clients.

2: Invest in Australian corporates with an exposure to export earnings

Some companies will do well in a falling AUD environment, despite the slower economy.  Sydney Airport for example benefits from increased tourism traffic, and to a lesser extent Perth or Brisbane Airports. Universities such as ANU may benefit from an increase in high fee paying international students.  Similarly, exporters such as Mackay Sugar, Newcrest and Fortescue will also benefit from a lower AUD. 

3: Reduce holdings in high risk assets or those with high growth multiples

Equities need earnings growth to perform, particularly when trading at high price-earnings ratios.  Low economic growth therefore typically means low equities performance.  Avoid overpriced equities as earnings are likely to disappoint in such environments.

History can be a poor guide of the future, but a repeat of this historic pattern is intuitive. Today we face a slow recovery globally, one driven by the relative strong US economy. The IMF, World Bank, OECD and most of the G20 central banks are forecasting the US economy to be growing faster than the G20 average for the next 2-3 years at least. The EU is struggling to keep out of recession for the third time in five years, with the critical German powerhouse stalling and Japan’s recovery threatened by the second round of its new consumption tax starting in 12 months.    

Commonly traded USD bonds as referred to in strategy 1 above include:

All prices and yields are a guide only and subject to market availability. FIIG does not make a market in these securities. All USD bonds mentioned in this article are available to wholesale investors only. This article should not be read as an AUD/USD currency forecast and investors should form their own view on the direction of the AUD/USD exchange rate.

Copyright The contents of this document are copyright. Other than under the Copyright Act 1968 (Cth), no part of it may be reproduced or distributed to a third party without FIIG’s prior written permission other than to the recipient’s accountants, tax advisors and lawyers for the purpose of the recipient obtaining advice prior to making any investment decision. FIIG asserts all of its intellectual property rights in relation to this document and reserves its rights to prosecute for breaches of those rights.

Disclaimer Certain statements contained in the information may be statements of future expectations and other forward-looking statements. These statements involve subjective judgement and analysis and may be based on third party sources and are subject to significant known and unknown uncertainties, risks and contingencies outside the control of the company which may cause actual results to vary materially from those expressed or implied by these forward looking statements. Forward-looking statements contained in the information regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. You should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Opinions expressed are present opinions only and are subject to change without further notice.

No representation or warranty is given as to the accuracy or completeness of the information contained herein. There is no obligation to update, modify or amend the information or to otherwise notify the recipient if information, opinion, projection, forward-looking statement, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.

FIIG shall not have any liability, contingent or otherwise, to any user of the information or to third parties, or any responsibility whatsoever, for the correctness, quality, accuracy, timeliness, pricing, reliability, performance or completeness of the information. In no event will FIIG be liable for any special, indirect, incidental or consequential damages which may be incurred or experienced on account of the user using information even if it has been advised of the possibility of such damages.

FIIG provides general financial product advice only. As a result, this document, and any information or advice, has been provided by FIIG without taking account of your objectives, financial situation and needs. Because of this, you should, before acting on any advice from FIIG, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If this document, or any advice, relates to the acquisition, or possible acquisition, of a particular financial product, you should obtain a product disclosure statement relating to the product and consider the statement before making any decision about whether to acquire the product. Neither FIIG, nor any of its directors, authorised representatives, employees, or agents, makes any representation or warranty as to the reliability, accuracy, or completeness, of this document or any advice. Nor do they accept any liability or responsibility arising in any way (including negligence) for errors in, or omissions from, this document or advice. Any reference to credit ratings of companies, entities or financial products must only be relied upon by a ‘wholesale client’ as that term is defined in section 761G of the Corporations Act 2001 (Cth). FIIG strongly recommends that you seek independent accounting, financial, taxation, and legal advice, tailored to your specific objectives, financial situation or needs, prior to making any investment decision. FIIG does not make a market in the securities or products that may be referred to in this document. A copy of FIIG’s current Financial Services Guide is available at

An investment in notes or corporate bonds should not be compared to a bank deposit. Notes and corporate bonds have a greater risk of loss of some or all of an investor’s capital when compared to bank deposits. Past performance of any product described on any communication from FIIG is not a reliable indication of future performance. Forecasts contained in this document are predictive in character and based on assumptions such as a 2.5% p.a. assumed rate of inflation, foreign exchange rates or forward interest rate curves generally available at the time and no reliance should be placed on the accuracy of any forecast information. The actual results may differ substantially from the forecasts and are subject to change without further notice. FIIG is not licensed to provide foreign exchange hedging or deal in foreign exchange contracts services. The information in this document is strictly confidential. If you are not the intended recipient of the information contained in this document, you may not disclose or use the information in any way. No liability is accepted for any unauthorised use of the information contained in this document. FIIG is the owner of the copyright material in this document unless otherwise specified.

The FIIG research analyst certifies that any views expressed in this document accurately reflect their views about the companies and financial products referred to in this document and that their remuneration is not directly or indirectly related to the views of the research analyst. This document is not available for distribution outside Australia and New Zealand and may not be passed on to any third party without the prior written consent of FIIG. FIIG, its directors and employees and related parties may have an interest in the company and any securities issued by the company and earn fees or revenue in relation to dealing in those securities.