The Australian dollar is making a comeback – But what does this mean for ASX stocks?

The Australian dollar has hit a six month high, driven by a combination of – the RBA's hawkish stance on interest rates compared to the Fed, robust commodity prices, and signs of stabilisation in China's economic growth outlook.

The Aussie dollar rallied to 67.7 US cents for the first time since early January. But Morgan Stanley says investors should embrace for a structurally higher Australian dollar for FY25, which will result in meaningful headwinds for overseas earners.

Australian dollar to US dollar chart (Source: TradingView)

There are several drivers that could take the Australian dollar to higher levels over the near term. The analysts flagged:

• There is the possibility that the RBA could hike again in August or September

• Improving carry profile as other central banks cut

• Relative growth expectations could favour the Australian dollar where Australia is ahead on 2025 outlooks vs. other G10 peers

• Robust risk sentiment should support the Australian dollar given its sensitivity to equities

Market implications

Macro considerations: When the Aussie dollar strengthens, imported goods become cheaper while exports become more expensive. The RBA estimates that a 10% rise in the Australian dollar could push inflation down by 20 bps in the first year and 100 bps over three years. The change in relative prices also has implications for economic growth. A 10% rise in the AUD could slow GDP growth by up to 1.5% over two years.

Commodity markets: A rising Australian dollar typically results in improved risk appetite for both commodities and the resource sector. "Any broader-based US dollar weakness could assist the commodity complex over and above current expectations and influence sector rotation," the analysts said. However, this will not happen in the short-term given the upcoming US election.

M&A to rise: A more structural increase in the Australian dollar could influence both offshore investor sentiment and inbound M&A activity. "For inbound M&A, the currency has been well entrenched in the 60s since 2021 ... should the AUD look to be structurally rising, this could trigger activity on valuation grounds as potential acquirers look to avoid any material shift in Enterprise Value (EV) of any transaction from this source," the report said.

Sectors at risk: The recent uplift to 67 US cents is testing upper assumption levels from both Morgan Stanley and consensus expectations. "The healthcare sector has FY25e and FY26e earnings linked to AUDUSD assumptions of 66/67 cents. Global grower stocks like Treasury Wine Estates, Aristocrat Leisure and Macquarie etc. also appear anchored to a similar range," says Morgan Stanley. If the Aussie continues to trend higher, then this headwind could be increasingly called out by management and influence forecast earnings.

Revenue exposure

The below table identifies industrial stocks within the ASX 300 that have significant foreign exposure, within Morgan Stanley's coverage universe. The stocks are ranked based on their exposure to the US dollar.

Source: Morgan Stanley Research

More broadly speaking, a rising Australian dollar has been positive for the broader ASX and more specifically, materials, resource and diversified financials.