For clients with superannuation accounts that have exposure to international equities we have purchased the iShares S&P 500 ETF (IVV), funded by the sale of the iShares S&P 500 AUD Hedged ETF (IHVV). The underlying exposures are the same, being large, established companies covering approximately 80% of the available market capitalisation of the top 500 US stocks. The only difference is that IVV is not hedged to the Australian dollar and hence performance is impacted by currency fluctuations – a weaker Australian dollar will add to the returns from the underlying equity market and vice-versa.

While the Australian dollar is around fair value against the US dollar on a purchasing power parity basis, historically the most significant statistical correlation with the local currency has been some combination of commodity prices and relative yields. In recent months, the local currency has however been remarkably resilient despite narrowing yield differentials on government bonds, diverging monetary policies and falling commodity prices. The US dollar is expected to remain well-supported given the Fed is lifting rates while other major central banks, including the RBA, are either holding interest rates steady or still easing monetary policy.

Speculative positioning in the Australian dollar has also gone from short at the lows early last year to long now, which leaves it vulnerable to change in sentiment.

Stronger global growth which typically benefits more cyclical currencies like the Australian dollar is an upside risk, and broad-based USD strength may turn out to be more muted than expected should the U.S. Congress and the Trump administration fail to agree on a fiscal stimulus platform.