Revisiting currency risk as the AUD swings

While the Australian dollar traded in a very benign US$0.62 to US$0.632 cent range during Q1 2025, all that changed on April 3, aka ‘Liberation Day’. Traditionally seen as a ‘risk-on’ currency, the AUD sunk to its lowest level in five years against the US dollar as risk-off sentiment took over markets following US reciprocal tariff announcements.

While it’s since recovered some ground, the AUD is still trading significantly below its historic average levels against the USD, as seen in the chart below.

USD to AUD exchange rate, 2015 - 2025

Source: Macrotrends as at 7 May 2025. Chart illustrates USD to AUD exchange rate from 1 April 2015 – 7 May 2025.

As a result, we’ve seen surging inflows into iShares currency-hedged equities products, as many investors who are cautiously re-entering the equity market after April’s market rout choose to do so on a hedged basis. The iShares S&P 500 (AUD Hedged) ETF (IHVV) and iShares Global 100 (AUD Hedged) ETF (IHOO) were both within our top 10 most popular local products on an inflow basis in April – together, these ETFs took in a combined $295 million.¹

For Australian investors, currency plays an important role in determining the eventual returns of their offshore investment.

In that context, let’s look at the performance of U.S. stock market in 2024. For US investors, the S&P 500 delivered an impressive 25% return last year. However for local investors who think about the world in Australian dollars, your annual return was an even stronger 37%.²

That’s a big difference and it’s entirely linked to the fact that when investing overseas, your return is a function of both the changes in that foreign market and the movement in the underlying market’s currency versus your own.

When an Australian investor buys U.S. equities, they have to sell their Australian dollars for U.S. dollars and then use those U.S. dollars to buy U.S. stocks.

When the investor goes to sell their investment, they need to reverse those steps, selling U.S. dollars and buying the Australian dollars back. In this way, the investor is ultimately exposed to fluctuations in the value of the Australian dollar.

2024 return (local currency)

Source: BlackRock data as of 31 December 2024

Performance figures represent past performance and are not indicative of future performance. Funds shown are for illustrative purposes only and should not be deemed as a recommendation to buy or sell the funds. Returns do not include fees or costs.

A weaker Aussie versus the greenback in recent years has played into the hands of the Australian investors who bought U.S. equities, boosting already strong US share market performance. As such, unhedged AUD returns were the clear winner last year.

However, AUD weakness may now be close to reaching an extreme, as currency pair performance is often a function of growth differentials.

When it comes to the USDAUD, The US’s better-than-expected growth, supported by high wages and a strong labour market, has supported the US dollar in the post-pandemic years. On the flip side, growth in China, Australia’s largest trading partner and the biggest consumer of its minerals, has disappointed in recent years as the economy struggled to recover from COVID disruptions. This, combined with high domestic inflation and low consumer confidence, has weighed on growth in Australia.

However, the ratcheting up in US protectionism may have reversed this dynamic, with US GDP shrinking in the first quarter of 2025 and a potential supply-driven recession on the cards as the US economy absorbs the impact of significantly higher tariffs. Meanwhile the latest economic data points to a recovery in China, with the nation likely to step up its existing stimulus measures to offset the effect of US trade barriers.

This, combined with a broader global rotation away from the US dollar as investors reassess its haven status in light of recent policy uncertainty, could leave the door open for a strong Aussie dollar in the long term.

With the risks here now looking more evenly balanced and the AUDUSD testing its historic valuation limits, iShares flow suggests that Australian investors believe that it’s high time to hedge. As seen in the chart below, net flows to our three largest hedged global equities exposures have taken off in April 2025 versus their Q1 average flow numbers as the Australian dollar hit a five-year low.

iShares hedged global equities inflows, Q1 vs April 2025

Source: BlackRock data as of 7 May 2025. IHVV refers to iShares S&P 500 (AUD Hedged) ETF. IHWL refers to iShares Core MSCI World ex Australia ESG Leaders (AUD Hedged) ETF. IHOO refers to iShares Global 100 (AUD Hedged) ETF

With many investors having temporarily exited the equity market to reduce risk during April’s tariff-related downturn, given the position and outlook of the Australian dollar versus the US, it may make sense for investors looking to re-establish their equity holdings to do so through a currency-hedged exposure. Of course, it's important to note that currency hedging does come with risks, as it can lead to a significant difference in returns compared to pure international equity exposure, as we've discussed earlier in this article.