Beware betting on a lower Aussie dollar

Heard this one? “The Aussie dollar is overvalued and, when it eventually falls, the share price of [insert name of company with a big portion of earnings in foreign currencies] is going to shoot up – big time.”

The eventual, inevitable weakening of our local dollar, particularly against the greenback, is an article of faith among many, if not most, investors. The same argument supports investing in overseas-listed companies as well – a weakening local dollar will provide a kick to your returns as your foreign-currency denominated investment is worth more.

As ever, it’s easy to say something will happen, much harder to say when. And from a look at what the experts are saying – and what the markets are predicting – you might be in for a long wait.

Of the 48 forex analysts surveyed by Bloomberg (both here and abroad), the median forecast for the $A/$US cross rate for 2013 is $1.02. And then – from a much smaller list of experts – it’s expected to be a median forecast rate of US99¢ in 2014.

Meanwhile, the forward market has priced in the local dollar to be worth a tad under $US1 in 2014 and then for it to drop to US93¢ in 2015. Lower, sure, but still high by historical measures.

Normally, a reducing gap between local and overseas interest rates would hurt the dollar, but that nexus looks to have broken as our currency achieves – possibly for the first time in living memory – “safe haven” status.

Pricing in interest rate markets suggests the cash rate target will fall by about half a percentage point over the next 12 months.

A bet on a weaker local currency, then, is probably a bet that the US will sort out its deficit problems and the economy will rebound within your investment horizon. With that in mind, it’s best to expect any currency effect to be an added bonus and not base any investment on that factor alone.

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