- Money Morning Australia

How to Play the Aussie Dollar for Big Stock Returns


Written on 22 December 2012 by Callum Newman

dollar_link_lge

If the world economy collapses anytime soon, at least one thing is certain: governments will have a hard time pinning the blame on ‘unfettered’ capitalism or free markets. There’s barely a week without a bureaucrat or politician meddling somewhere and distorting the true picture.

Lately, it’s Shinzo Abe and his grand plan for Japan. And now Wayne Swan and his budget deficit. All this is going to impact on the Australian dollar.

In today’s Money Weekend we’ll expand on an idea we briefly covered in the Daily Reckoning during the week. If you didn’t catch it, here’s the gist of what we wrote on Tuesday…

‘The Next Shot in the Currency War

‘Shinzo Abe is back in control of Japan.

‘The ‘new’ prime minister has made no secret of the fact that he wants the Bank of Japan to up the stakes in the currency war. The Bank of Japan has a 1% inflation target. Abe wants them to double it to 2%.

‘Currency wars are about devaluation to encourage exports. The idea in Japan is to weaken the yen and kick-start the moribund economy. Although that’s been the plan for about 20 years now, to no avail.

‘Not to worry, the currency markets took notice! On news of Abe’s election, the yen dropped to the weakest level against the US dollar since 2001, according to Bloomberg.

‘Following his victory, Abe grabbed the nearest mike on Monday and told the Bank of Japan that the people had spoken and they should look to fire up inflation when they meet on Wednesday to discuss policy.

‘No doubt Abe was quick to move because time is something Japanese Prime Ministers have been notoriously short of. This is Abe’s second crack at the helm, and he’s Japan’s fifth Prime Minister since 2007.

”Mr Abe plans to empower an economic council to “spearhead” a shift in fiscal and monetary strategy, eviscerating the central bank’s independence,’ wrote Ambrose Evans-Pritchard in the Telegraph.’

Happy New Year from Japan

Looks like January will be the month the big guns roll out in Tokyo. The Bank of Japan will ‘officially adopt an inflation target, as demanded by presumptive Prime Minister Shinzo Abe, next month,’ and the new Liberal Democratic Party will have its economic stimulus package in the pipeline before the start of February.

Japan is the third biggest economy in the world. That’s a lot of spending power. Very soon a lot of yen is going to be sloshing around looking for a home, especially yield. You’d think some of that is going to find its way to Australia.

That’s why Slipstream Trader Murray Dawes speculated on Tuesday that the yen carry trade could make a big surge next year and could boost Australian stocks.

Reuters spelled out the effects for countries in the yen/USD crossfire, like developing economies. We’d add Australia too. ‘As newly minted cash pours into their economies in search of higher yields, either their exchange rates will rise, making exports less competitive, or they will have to cut interest rates and/or intervene to hold down their currencies.’

Enter Wayne Swan. The decision to let go of the surplus means that the government will have to issue more bonds to get the financing. Our take is that means even more foreign money coming into Australia to buy government bonds and holding up the Aussie dollar.

So it’s hard to see the Aussie dollar offering any relief anytime soon to the industries that suffer with a high exchange rate. You can see below the Aussie dollar hit a high against the yen this week.

AUD/JPY

Source: Yahoo Finance

One Way to Play the High Aussie Dollar

You could argue, like our own Kris Sayce, that the Aussie dollar is due for a correction. Maybe. We don’t know. But there’s no doubt the high Aussie dollar is something you can take advantage of as an investor.

Australia is a small, open economy. That’s why large capital flows coming from countries like Japan have such a big impact here. Remember, the Australian economy is only 2% of worldwide GDP.

So now looks like a great chance to use the strength in the Aussie dollar to buy assets overseas. You can easily do this by adding exposure to foreign markets to your portfolio.

The Aussie stock market is dominated by resources and banks. The ASX index moves when these two sectors move. So if you want a truly diversified portfolio, that’s not great.

That’s why it makes sense to diversify the industries and markets you’re exposed to via shares in other countries. But what’s the best approach? Which overseas markets do you look at?

That’s a tricky question. But one way is to look at large multinational corporations with exposure to many countries rather than just one.

This has been a theme used by our colleague Dan Denning this year in his Denning Report. His position is big global blue chips are the best way to give your portfolio international diversification.

Global blue chips have proven and durable business models. They’re not usually correlated to one economy because they operate in so many different markets worldwide. Companies like these can also tap into the growth offered by emerging economies.

Australia has very few non-mining globally competitive companies. News Corporation and CSL are two that spring to mind. But it’s a short list.

Long term, if you’re worried about having too much exposure to one economy, it makes sense to look at the bigger picture. Right now with the Aussie dollar near a multi-year high, there are worse things you can do than picking up a few of the world’s diversified big name stocks.

Callum Newman
Editor, Money Weekend

The Most Important Story this Week

You could say there’s two ways to approach the volatility in the share market today. One is to get out of stocks all together and not deal with it. That’s not very helpful when it comes to building your wealth. The second is to turn the volatility to your advantage. Kris Sayce explains how in Australian Stocks: Still the Best Wealth Builder in Town

Highlights in Money Morning This Week…

Murray Dawes on Why You Should Watch the Japanese Yen: ‘So after two decades of printing money and spending it without successfully reviving the Japanese economy, they’ve decided to give it another go. Japan really is the poster child for failed Keynesian stimulus policies.’

Shah Gilani on Why We Should Abolish the Fed: ‘The Federal Reserve System is a government-sanctioned private enterprise that functions as a socialist tool…These days the Fed doesn’t just backstop America’s too-big-to-fail banks. It has expanded its doctrine of socializing banking losses globally.’

John Stepek on Is China’s Rebound for Real? Don’t Bet on It: ‘Suddenly all those people who briefly turned bearish earlier in the year are now declaring that there will be no ‘hard landing’ for China. We’re not convinced. The business model that got China to where it is today is irretrievably broken.’

Dr. Alex Cowie on Why Uranium Stocks Could be Worth Another Look: ‘This week’s Japanese election win for the nuclear-friendly LDP has been the trigger to set off this rally…But there is more to the rally than meets the eye. There is something else in the wind.’



Already a subscriber to Money Morning... or simply, just like what you're reading? Then show your support and spread the word...
Share this post on...
Share

Callum Newman
Callum Newman is editor of the Money Morning weekend edition and co-editor of Port Phillip Publishing’s subscribers-only email Scoops Lane. (To have Money Morning delivered straight to your inbox you can subscribe for free here). If you're already a subscriber to these publications, or want to follow Callum's financial world view more closely, then we recommend you join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Money Morning essays.

Leave a Comment

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.

If you would prefer to email the editor, you can do so by sending an email to moneymorning@moneymorning.com.au


Comments are closed.



FREE INVESTMENT REPORT: The Top 5 Oversold Blue-Chip Stocks in Australia


These five Aussie stocks all have something very powerful in common…and it could see them bounce up in the coming weeks and months. For all the details download this report right now.

PLUS you'll get Money Morning every weekday...absolutely free.

Enter your email address below and hit the 'Claim My Free Report' button now.

Privacy Statement
We will collect and handle your personal information in accordance with our Privacy Policy.
You can cancel your subscription at any time

Diggers and Drillers

A 3-Point Plan to Re-Engage with the Aussie Mining Boom


This new video reveals a way for Aussie share investors like you to RE-ENGAGE with the next phase of the mining boom…while valuations are still dirt-cheap…


The plan centres round three specific stocks.


To find out what they are, click here.

Australian Small-Cap Investigator

The Australian wildcatter
exploring oil's 'final frontier'


The US Geological Survey says this area contains up to 71 billion barrels of oil.

Only a few explorers have secured licences to drill.

One of them is a daring little Aussie firm that begins drilling 'in early 2014'.

According to small-cap analysts Tim Dohrmann it's impossible to speculate just how high this one could go. Find out why here.

World War D

Couldn’t make it to our
‘War Summit’?


Don’t sweat it. Click here for the next best thing…


World War D was the most important meeting of minds of the decade so far. What came out of it will almost certainly force you to reshape your investment plan for the rest of the decade. There's no way to go back in time and get inside the Savoy Ballroom of the Grand Hyatt.

But you can do the next best thing…
to find out what it is, click here.

  • ^NDX3557.036-31.769 - -0.89%
  • ^FTSE6674.74-7.02 - -0.11%
  • ^AORD5520.500+18.300 - +0.33%
  • ^AXJO5536.400+18.600 - +0.34%
  • AUDUSD=X0.9293
  • USDJPY=X102.525

Graphic Ad 1 – Blue Chip Stocks Report


Revolutionary Tech Investor

This report is about TECH MOON-SHOTS


Four of them, to be precise.


It's an early-days project. But one biotech aiming for the cancer moon-shot is already up - get this - 497.14% since tipped.


For four more tech moon-shots, click here.

Gowdie Family Wealth

WARNING:
The worst mistake you can make when handing wealth on to your kids


This brand new investor briefing shows you what your family’s in for if you don’t take care to leave your wealth to them in exactly the right way.


And it shows you precisely how to prevent infighting, recklessness and misunderstanding over money.


Read it here.

The Money For Life Letter

Holden. Toyota. Qantas. BUST


Do you really expect the share market to boom in times like these? That's why Nick Hubble says the best thing you can do right now is invest for safety and income.


This brand new video shows you how you can get predictable, reliable and rock solid cash flow no matter what happens in the wider economy.


You could lock in up to $20,000 a year - and that's just the start. See how here.



Sound Money. Sound Investments. [bullish prediction]

Greg Canavan's first bullish prediction in four years


Greg Canavan
doesn't make forecasts like this often.


When he does, it's because he’s found something that could make you money for years to come.


Read more here.

Is the Australian Housing Boom Really Back?

The Denning Report

2014 Predicted


Dan Denning accurately forecast 2013's flight from
bonds to stocks, the commodities crash and the
Aussie dollar top…to the exact week


In this brand new forecast report, he shares his
three critical predictions for 2014…

More Recommended Reading Below...

The Pursuit of Happiness & The Daily Reckoning

  • The Pursuit of Happiness
  • The Daily Reckoning Australia

Two days from now Australia will get a taste for what happens in American sports stadiums every day [Read More...]

Would you approve this chemical? Would you allow this to come to market? Table salt would simply not [Read More...]

If these lessons can be passed onto the next generation, what a world it would be. Healthier, genuin [Read More...]

3D printing is changing medicine, consumer products, art and manufacturing. The impact it’s having o [Read More...]

Done properly, a retirement business can not only help fill a retiree’s time and replace their work [Read More...]

It was necessary just to stay in the same place. Take it away, the US stock market crashes...and the [Read More...]

The end of Australia’s recession-less run is waiting somewhere. Even the US is due for another reces [Read More...]

You can see the property cycle and how it moves and turns, all around you. Get used to it. Australia [Read More...]

A high Australian dollar means we’re doing well at exporting. A low one means our trade balance is l [Read More...]

From the invasion of the Philippines to the Vietnam War…the US empire was financed by the rich, prod [Read More...]

TESTIMONIALS

"I think you're fantastic! I love to read what you write...you're so interesting and amusing and I've learned so much" -
Money Morning reader, Chris Gadd

"You guys are brilliant. I feel more relaxed about the future than ever simply because I know what is going on rather than floundering around with smoke screens and mirrors from the government and mainstream" -
Money Morning reader, Helen Carter

"Wow what can I say? I was an economically confused moron until I read your newsletter and even though I've been a subscriber for a short period I can now see how easy it is to understand, if you use common sense and can have the spin translated into everyday language. Thanks for an entertaining read." -
Money Morning reader, John

"Keep up the good independent and well thought out articles offering a view that often debunks mainstream myths." -
Money Morning reader, Craig

"I do admire your straight talking and simple analysis of the situation, I think of you as the Jeremy Clarkson of finance." -
Money Morning reader, Jeffery