How the Australian dollar affects companies

The Australian dollar has been moving higher against its US counterpart since last week’s decision by the Federal Reserve to raise interest rates. This is even after the RBA’s March meeting warned of a “build-up of risks associated with the housing market” in Sydney and Melbourne.

What does this mean for Australian companies?

To help answer this question, Professor Dirk Baur made a very quick analysis of the impact of the AUD on the financial reports of 4 companies: Evolution Mining, a gold miner, Qantas, an airline, JB Hi-Fi, a consumer goods retailer, and Carsales.com, an online platform for buying and selling cars.

1. Direct exposure to commodities

It’s important to note that the Australian dollar is a special currency because it moves according to the prices of commodities and the shares of commodity-based companies. It’s a “commodity currency”.

This commodity-currency link is especially important for Evolution Mining, which benefits from rising gold prices, and for Qantas, which loses if oil prices rise. Since the AUD rises when commodities rise, an appreciating AUD is good for Evolution Mining and bad for Qantas.

2. No exposure to commodities

The other companies have currency impacts more in line with classical theory. JB Hi-Fi imports much of the goods it sells, so profits are positively affected by a stronger AUD, as imported goods become cheaper.

AUD movements have a similar impact on Carsales.com’s operations in Australia because a lot of cars and parts are imported. However, the company also operates in Latin America and in Asian markets, which makes the overall effect more difficult to measure, as it depends on the correlation of currencies within these regions and between the regions. A higher correlation usually implies a higher currency exposure.

Each one of the above companies tries to minimize currency risk by locking in the price over a certain period using forward exchange contracts and derivatives.

Overall, because the Australian Dollar is a commodity currency, it has a more obvious impact on companies such as Evolution Mining and Qantas than on companies such as JB Hi-Fi and Carsales.com.

To read more, follow this link to Professor Dirk Baur’s article on TheBull.com..

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The information contained in this article is General in nature and has been prepared without taking into account your objectives, financial situation and needs.

 

Joao Costa Pereira
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Joao Costa Pereira

Equity Research Analyst at United Global Capital
BSc Economics, MSc Finance
Joao is an Equity Research Analyst at UGC
Joao Costa Pereira
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