Aussie Dollar's Hidden Impact on ASX200

The exchange rate has a profound impact on stock market returns in Australia, particularly for commodity producers that sell their resources in US dollars. The Aussie dollar's performance is closely tied to the country's trade balance, which means a booming commodity industry can actually cause the currency to appreciate, offsetting the gains of exporters.

This phenomenon was evident during the 2008 global financial crisis, when the AUD crashed, but the losses for Australian investors holding US stocks were significantly reduced. In fact, the Aussie dollar fell at the same pace as US stocks during the worst months of that year, fully offsetting the losses.

A fund manager who spoke to Fat Tail Daily revealed that their impressive long-term performance was due in part to owning only foreign stocks when the AUD was falling and local ones when it was rising. This strategy harnessed the exchange rate's weakness to generate profits.

The importance of exchange rates is not unique to Australia, as the UK's experience with Brexit demonstrates. The pound's sharp decline after the referendum vote attracted investors and boosted foreign earnings for listed companies.