How the bipolar Aussie dollar will make or break your portfolio

Imagine a list of the ten most important investment trends over the next decade…

No doubt your list is different to anyone else’s. But one thing about my own version of the list stands out…

Half the trends are absolutely terrible for the Australian dollar’s prospects. And the other half are fantastic for the Australian dollar’s future value.

This creates a real pain in the neck. It’s incredibly difficult to figure out which side wins out. And yet, this is probably the most important question Australian investors need to answer.

Why?

Because it defines the most important asset allocation of your portfolio.

Should you invest overseas to harness the immense power of a falling Aussie dollar? Or keep your money local as the Aussie dollar powers back above parity?

Does the exchange rate really
matter that much?

I once chatted with a young reader at one of our investing summits. He’d just been hired by a boutique fund manager. The fund was shooting the lights out. It topped all sorts of metrics, leaving peers in the dust.

‘This investing business is easy,’ the reader told me. I’m still not sure how serious he was.

But how had the fund done it?

It owned a lot of American stocks. They hadn’t actually gone up in price, my new friend eventually admitted. But the Aussie dollar had fallen a lot. This generated impressive returns when the portfolio was measured in Aussie dollar terms.

Had this currency play been a deliberate strategy? Nope.

The fund had bought the stocks for their valuations and growth potential. Neither of which had played out very well. And yet, the fund was topping the charts…in Australia.

Australian gold investors know this feeling. The US dollar gold price went nowhere between August 2020 and the start of 2024. Americans were muttering about it on gold forums.

But in Aussie dollar terms, gold continued to soar. The uptrend that began in 2018 was barely interrupted. Likewise in a long list of other currencies.

It’s ironic that America is home to both the world’s best advocates for investing in gold and to the investors least likely to benefit from the precious metal.

The US dollar has a habit of surging alongside the gold price during periods of geopolitical crises, for example. While the rest of the world’s investors benefit from a rising gold price and a falling local currency, US investors see the strong US dollar cancel out gold’s gains.

It’s not just the US dollar that can move, of course. Gold investors need to have a firm grip of local issues in case their home currency makes a move.

So, who better than Brian Chu, the Founding Director of The Australian Gold Fund, to tell you what happens next in the Aussie gold stocks market?

My own income is defined by exchange rates too. I earn British pounds and Australian dollars, while moving back and forth between Japan and the Sunshine Coast.

The exchange rate moves have boosted my income substantially for years now. The pound is up, and the yen is down. But things could just as easily swing the other way.

More intriguingly, I cannot for the life of me figure out whether my net worth is growing or not at the end of each year. In terms of yen, I’m richer than ever. Measured by the global reserve currency, the US dollar…not so much.

One thing is clear: the exchange rates are dominating my returns.

My point is that how you measure something can define the outcome more so than the underlying thing being measured. Measured in US dollar terms, the Australian economy and even property prices have been performing terribly.

But is that really true?

It depends entirely on how you look at it.

In terms of yen, the Japanese stock market has been going gangbusters. In terms of US dollars…not so much.

It’s all terribly confusing. But what if it’s also terribly important, as my friend the fund manager showed?

Then you need to understand what the Australian dollar is in for…

A fork in the Australian dollar’s road

Perhaps the most important driver of the Australian dollar is commodity prices.

Those have been experiencing a rough time recently. The implosion of Net Zero projects and China’s struggling economy are behind the plunge in resources like iron ore and copper. And the Aussie dollar has been suffering in response.

Will commodity prices turn back up?

I think that’s unlikely in a world starved of cheap energy — another key trend for the Aussie dollar. We have a lot of energy resources. But will we tap them under a climate change obsessed government?

Well, governments change. New Zealand is busy proving that point.

But what about global issues like government debt and demographics? They favour our dollar.

Australia is one of very few developed Western countries without crippling levels of government debt. Europe and the US are in trouble.

Historically speaking, when governments dig a hole this deep, they resort to inflation to get out of it. By devaluing the currency, the national debt becomes worth less over time.

This implies devaluing the currency on exchange rate markets too. But Australia is likely to escape this fate because of our low levels of debt. That implies the Aussie dollar will be strong relative to the US and European currencies. A major tailwind over the next decade, if you ask me.

Not only that, we can continue to manage immigration rates to keep our debts affordable. Europe seems to be hitting some sort of political ceiling on that front.

Our debt load also means that the Reserve Bank can keep interest rates higher for longer than central banks in other countries can. The Fed, ECB and Bank of England risk bankrupting their government if they raise rates much more…

So our inflation fighting capacity is much stronger. But higher rates tend to make currencies stronger too. The Aussie dollar could outperform if inflation comes back.

One thing to note about exchange rates is that they tend to oscillate rather than trend indefinitely. The value of currencies rarely goes up infinitely or down to zero. At least, not relative to each other…

The Aussie dollar has fallen since the commodity boom peaked out in 2011. It is now near a bottom it bounced off in 2008 and during the pandemic. The outlook is therefore quite good by this metric.

To sum up, I’m bullish the Aussie dollar for the next ten years. But that’s a product of the particular trends I think are important.

You and I probably have a different opinion about what the most important investment trends of the next decade actually are.

But we should agree on one thing: their impact on the Aussie dollar should define how you invest during that decade.

Until next time,

Nick Hubble,
Editor, Strategic Intelligence Australia

Nick Hubble found us at Fat Tail Investment Research in 2010 after a stint inside Wall Street’s most notorious bank, Goldman Sachs, during the 2008 GFC. That’s where he saw the true nature of the investment banking business. Since then, he’s been the editor of the Daily Reckoning Australia and the UK-based Fortune & Freedom and Gold Stock Fortunes.

He’s delighted to work as Investment Director and Editor for Jim Rickards’ Strategic Intelligence Australia. Here he helps turn Jim’s big-picture views into specific actionable advice and ideas for Australian investors.