Where to for the Aussie dollar?

Where to for the Aussie dollar?

Like many things in financial markets, exchange rate movements are very difficult to predict. At Montgomery, we don’t claim to possess unique insight into future exchange rates, and so they typically don’t play much of a role in our investment process.

Having said that, in recent years it has seemed to us – as well as many others, including Glenn Stevens – that the $A was at levels that would be difficult to sustain long term, and in structuring our portfolios we have tended to look a little more kindly on high quality businesses that generate significant revenues offshore.

With recent sharp falls in the $A$/$US exchange rate, it is perhaps timely to consider whether further downside potential exists. As always, this is a difficult question, and there is a wide range of possible outcomes. However, a couple of relevant observations include:

• The $A$/$US exchange remains somewhat elevated in the context of recent decades, as shown below;
• Having peaked some years ago, prices for a number of the commodities Australia exports will remain under pressure for as long as demand lags supply; and
• The prospect of interest rate cuts in FY15 in response to a weakening economy will further diminish the appeal of the $A to foreign investors.

AUD/USD Exchange Rate

For our part, the Montgomery Fund remains comfortable with its holdings in companies like CSL, Sirtex and Resmed.

MORE BY TimINVEST WITH MONTGOMERY

Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.