The Australian dollar remains at a historically low level against the US dollar.

Joseph Taylor caught up with Matt Wacher, Morningstar Investment Management's Chief Investment Officer in Asia Pacific, to hear his thoughts on the Aussie dollar's outlook and what this could mean for investors.

"It's not necessarily been anything too fundamental with the Australian market. It's more the U.S. dollar has been super strong"

Joseph Taylor: So we've seen a lot of stories, a lot of press articles on the Aussie dollar being rather weak at the moment against the U.S. dollar. Is that a positive or a negative for Australian investors?

Matt Wacher: Well I'm going to hedge my bets and say it depends. I mean obviously for Aussie investors investing in the Aussie market it doesn't have too much of an effect but certainly if you're investing offshore in U.S. assets, depending whether they're hedged or not, it could be a really good positive if you're buying U.S. assets that have done very well or U.S. equities that have done very well on an unhedged basis. That kind of probably juiced up your returns a bit over the last year, in fact over the last couple of years.

Taylor: So you mentioned that it might have juiced up returns from the U.S. over the last couple of years, as if they needed another tailwind because U.S. stocks have been very strong anyway. On your side of things, how has this affected managing allocations and portfolios?

Wacher: So we need to be aware of our exposures to the U.S. In particular, the equity market is getting a little bit expensive there we would say. I mean if your allocations are also getting this tailwind from the currency, from your U.S. allocations from being unhedged, then it's going to grow much bigger than other assets that you have in the portfolio including Aussie equities. And I think it's important to note that most of the other currencies, certainly the G7 currencies and the Aussie, they've all fallen, some a bit more than others relative to the U.S. So it's really the case of the Aussie dollar being weak, it's not necessarily been anything too fundamental with the Australian market, it's more the U.S. dollar has been super strong over the last couple of years. You see that in the yen, the pound, all the currencies have weakened relative to the U.S. dollar.

"We really need to see how some of Trump's policies play out"

Taylor: Do you think that might reverse?

Wacher: Well most people say it's not. So the contrarian in me thinks perhaps maybe. Certainly at this point in time some of the other currencies are looking pretty cheap on a few different measures but there is the theme of U.S. exceptionalism still out there and that's still part and parcel with the U.S. dollar as well.

We'll see how things play out though because I think especially something like the yen, the currency like the yen, if interest rate rises do start to flow through there then maybe the yen is actually a pretty interesting place to have some fun, so Japanese equities or Japanese assets. But I think that it's more a case of with Trump coming in we need to really see how some of his policies play out and I think that will really affect U.S. dollar strength or not.

"The Aussie dollar looks reasonable value against the US dollar according to some of our metrics"

Taylor: For individual investors who might not necessarily want to dabble in several different currencies, a decision here might boil down to if they have a hedged ETF or if they have an unhedged ETF. Do you have any thoughts on how an individual might approach that?

Wacher: I think if we're talking a global equities type ETF, generally speaking, that's going to have a large amount of U.S. assets in it, the U.S. being the largest part of the benchmark. So probably at this point in time, entering into a hedged ETF with the Aussie dollar quite weak is probably not a bad thing to be doing on the balance of probabilities.

That's not to say that the Aussie dollar couldn't go down further, but it's fallen a lot. It's looking like it's reasonable value versus U.S. according to some of our metrics. And we think that probably the probabilities are that you might get a bit of a rally over the next 12 to 18 months in the Aussie.

So having some of your foreign assets, whether it be through an ETF or a managed fund or something like that in hedged exposures is probably an interesting place to be at this point in time, potentially the balance of probabilities are on your side.

Downside US inflation surprises and a cautious RBA could help

Taylor: So speaking specifically about the Aussie dollar versus the U.S. dollar, are there any events that could trigger a reversal?

Wacher: Maybe, you know, if some of the tariffs that Trump has said that are going to occur don't eventuate or aren't as large as what he's been anticipating. Perhaps that can really start to support some of the other currencies that have certainly even sold off much further than they already had when Trump was elected.

Other things like inflation surprises more to the downside, especially in the U.S. We saw one that looked a little bit better last week, you know, in mid-January. I think that, certainly anything that shows a little bit of fundamental weakness in the U.S. is going to potentially provide a tailwind to all the other currencies, but the Aussie dollar as well. 

I think on the other side of the fence, if the RBA are a bit more cautious about rate rises, which they have been so far, then potentially that adds a little bit of support to the Aussie as well.

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