CAN THE AUSSIE DOLLAR STILL DIVERSIFY RISK?

CIO MONTHLY | MARCH 2018

Twenty-six years of uninterrupted economic expansion. Australia's recent performance is now unmatched in history. While a handful of factors have been key to this outcome, without doubt, the floating of the Australian dollar in December 1983 was one of the most critical.


The Australian dollar has been a useful tool for diversifying risk in offshore equity investments, often partly insulating negative returns when global markets correct lower. Indeed, since its float, the Australian dollar has had a positive correlation with the US equity market (thus, partly insulating losses) 60% of the time, rising to over 70% of the time since 2005.

While we remain cautiously engaged with risk, despite recent market corrections, we remain overweight global equities where we see stronger momentum in economic and earnings growth. But with the US dollar on a weak trend, and some forecasts for the Australian dollar for 2018 as high as USD 0.85, can the 'little Aussie battler' still play a role in diversifying risk?