The Australian dollar has declined from a 2013 high of USD1.0598 as of Jan. 10 to as low as USD0.8905 on Aug. 2.

The aussie is back at USD0.9185 as of this writing, having recovered some of the further ground it lost leading up to the Reserve Bank of Australia’s Aug. 6 decision to cut its overnight cash rate target by 25 basis points to an all-time low 2.5 percent.

Not even during the depths of the Great Financial Crisis did the RBA’s benchmark rate plumb such levels.

The aussie’s 16 percent top-to-bottom decline during 2013 has taken a deep bite out of total returns for US-based investors. For a big-picture example, the S&P/Australian Securities Exchange 200 Index is up 10.8 percent in local-currency, price-only terms this year. Including dividends the Australian benchmark is 13.3 percent to the positive.

These figures compare favorably to the 16.5 percent price-only and 18.1 percent total-return figures for the S&P 500 Index and the 12.7 percent and 14.7 percent results for the MSCI World Index.

Accounting for the impact of the softer Australian dollar makes for a different, depressing story for US-dollar-denominated investors: From Dec. 31, 2012, through Aug. 15, 2013, the S&P/ASX 200 is down 2.7 percent in US-dollar-adjusted price-only terms, with dividends mitigating the loss to only 0.6 percent.

At a Portfolio level, our 15 Conservative Holdings have posted an average Australian-dollar, price-only gain of 12.5 percent. Including dividends boosts the return to 15.3 percent.

Our 11 Aggressive Holdings are up an average of 0.6 percent on a price-only basis, 2.7 percent including dividends.

The picture shifts negative due to the change in the US dollar-Australian dollar exchange rate. The Conservative Holdings are down 1.3 percent in US-dollar, price-only terms. Including dividends lifts the return to a positive 1.3 percent.

The Aggressive Holdings, meanwhile, have depreciated by 11.7 percent, with dividends boosting the total return to a negative 9.9 percent.

The RBA flagged slower growth for the Land Down Under in the near term in its most recent quarterly monetary policy report, released Aug. 6 in conjunction with Governor Glenn Stevens’ statement on the central bank’s most recent adjustment to the overnight cash rate target.

The RBA’s most recent forecast includes a downgrade of gross domestic product (GDP) growth through December 2013 2.25 percent and a projected rise in unemployment through 2014.

For the next 12 months GDP should grow at a pace “a little below trend” of approximately 3 percent before picking up to above 3 percent after mid-2014.

The exchange rate is a key factor driving the RBA’s interest rate decisions: In short, a lower exchange rate boosts domestic economic growth. It makes exporters more competitive and increases their income in Australian dollar terms. It makes local industries more competitive. A business might decide to keep its production onshore rather than seeking a lower-cost foreign jurisdiction.

And consumers might decide to head up or down the Australian coast rather than go to Fiji or New Zealand for a holiday or to upgrade their kitchen.

According to the RBA’s quarterly statement, “Central estimates from this range suggest that a 10 percent depreciation of the exchange rate stimulates GDP growth by 0.5 to 1.0 percentage point over a period of two years or so.” Current forecasts are based on the assumption that the exchange rate will stay at around USD0.90.

The series of rate cuts that’s brought the overnight cash rate from 4.75 percent as of October 2011 to 2.5 percent has reduced the rate-margin premium built into the value of the Australian dollar versus currencies such as the US dollar, which had been viewed as relatively weak due to the US Federal Reserve’s “cheap money” policy that’s included a “zero-bound” fed funds rate and a program of open-market bond buying on the order of USD80 billion a month.

Weakness in China has also begun to be felt by its close trading partner to the south. The RBA’s revised forecast contemplates a slowing of Australia’s mining-and-resources led economic rush, as friction in the form of the Middle Kingdom’s inevitable transition from a capital-investment-driven growth model to one oriented around domestic consumption and the build-out of civil services for an evolving middle class.

The RBA’s goal is to effect a smoothing out of the Australian economy, boosting sectors other than mining and resources in an effort parallel to that China is embarked on: to find a sustainable level of long-term growth.

Winners and Losers

AE Portfolio Conservative Holding Australia and New Zealand Banking Group Ltd’s (ASX: ANZ, OTC ANEWF, ADR: ANZBY) fiscal 2013 third-quarter trading update, including management’s commentary during its conference call to discuss results, focused a great deal on the impact of the Australian dollar’s decline.

Results were solid: ANZ posted a 7 percent increase in statutory net profit after tax for the nine months ended June 30, 2013, was consistent with the run-rate Australia’s third-largest bank by market capitalization established for the first six months of its fiscal year.

An 11 percent increase in cash earnings beat the 8 percent pace reported at the half-year mark.

Revenue was up 5 percent, though earnings growth was driven by a 0.5 percent reduction in expenses and a 2 percent decline in impairment charges for bad loans. Cost-cutting has been an important aspect of ANZ’s profitability in this low-interest-rate environment where consumers are nonetheless loath to take on more debt.

ANZ also reported an 8 percent increase in its net lending assets, more than funded by a 12 percent increase in deposits. Management noted that it’s holding or gaining market share across its key segments, with good momentum in commercial lending and deposits and retail mortgages and deposits.

Net interest margin was down two basis points relative to the end of March and three basis points if global markets were excluded. Management noted that net interest margin is likely to decline several more basis points by the end of the fiscal year because of the continuing impact of the low interest rate environment and pressure on its international and institutional margins.

Bad and doubtful debt levels continue to either hold steady or edge down further despite the economic conditions, indicating a tight focus on credit quality.

ANZ’s major distinction among its “Four Pillars” peers is its “super-regional” strategy, highlighted by an aggressive expansion into Asia. Management noted good volume growth and a 5 percent increase in revenue from beyond Australia and New Zealand.

There’s another aspect of the story with particular relevance today: Currency shifts have a more material impact on ANZ than most of the other majors.

ANZ’s strategy doesn’t depend on the level of the Australian dollar. But management did note that a weaker aussie “is generally a good thing” for ANZ.

There’s a translation gain, with foreign currency earnings looking better in aussie terms. But management noted in particular the positive impact on “a lot of [its] customers.”

ANZ’s super-regional strategy emphasizes servicing and financing exports. A significant number of its Australian customers do better with a lower currency, which drives demand for currency hedging and for trade finance. Management is already seeing this in its results. And should it continue the credit quality of its low-risk, export-focused portfolio will get even better.

Australia & New Zealand Banking Group is a buy under USD30 on the Australian Securities Exchange (ASX) using the symbol ANZ and on the US over-the-counter (OTC) market using the symbol ANEWF.

ANZ also trades on the US OTC market as an American Depositary Receipt (ADR) under the symbol ANZBY. ANZ’s US OTC-traded ADR represents one ordinary, ASX-listed share. ANZ’s ADR is a buy under USD30.

Other financials that will benefit from a weaker aussie versus the buck include QBE Insurance Ltd (ASX: QBE, OTC: QBEIF, ADR: QBEIY), whose US and European operations are each larger than its Australian business. With important contributions from Latin America, Asia and reinsurance, QBE is in good position to benefit from a weaker Australian dollar.

QBE’s share price has enjoyed a solid run in 2013, rising from AUD10.90 to open the year go AUD16.90 as of this writing. Part of this is likely a recognition of its position vis-à-vis the Australian dollar. But its underlying business is also improving, despite a few profit warnings and bumps.

Among the latter are potential claims against Renfe, Spain’s government-owned train operator, in the aftermath of a July 26, 2013, fatal derailment in northwest Spain. QBE Insurance is a hold at these levels.

Mining stocks whose operating costs are denominated in Australian dollars but whose revenues derive from the sale of US-dollar-denominated outputs also should see earnings uplifts due to the downturn of the aussie.

Aggressive Holding BHP Billiton Ltd (ASX: BHP, NYSE: BHP), one of this month’s Sector Spotlights/“best buys,” offered a compelling if not entirely bullish view on the impact of the falling aussie on results.

A weakening Australian dollar should help the resources giant overcome a drop in key commodity prices. BHP and other mining companies are major exporters, trading in US dollars, and when they convert back to the aussie at these levels it’s positive outcome.

But BHP CEO Andrew Mackenzie, in a recent presentation to the Bank of America/Merrill Lynch Global Mining Conference offered an interesting insight into why the big miners might not necessary ride a straight line higher due to the weaker aussie.

Although every cent the Australian dollar falls against the US dollar adds USD110 million to BHP’s 2013 net profit, every USD per metric that the iron ore price falls subtracts the same USD110 million from the bottom line.

There’s clearly a balance the RBA must straddle, which isn’t entirely in its control, comprised of global growth and the relative value of the aussie.

BHP Billiton is a buy for the long term up to USD40 on the Australian Securities Exchange and up to USD80 on the New York Stock Exchange.

Smaller mining-and-resource player Atlas Iron Ore Ltd (ASX: AGO, OTC: ATLGF) has noted that the falling Australian dollar has boosted margins by 20 percent to 25 percent. CEO Ken Brinsden doesn’t expect iron ore prices to be “stressed” in fiscal 2014, underlining the positive impact the company sees from the weaker domestic currency.

Management reported that fiscal 2013 shipments were up 25 percent and targeted fiscal 2014 production of 9.8 million to 10.3 million metric tons, which would represent a significant step-up for the company. Atlas Iron ore is a speculative buy for aggressive investors up to USD1.

BlueScope Steel Ltd (ASX: BSL, OTC: BLSFF, ADR: BLSFY), which had been struggling in the face of cheap imports, should enjoy a more competitive landscape with foreigners due to the lower aussie. Management expects to report a continued improvement in financial performance for the second half of fiscal 2013, with guidance for a “small” net profit after tax.

Results for the first half of fiscal 2013 were much better than the prior corresponding period. BlueScope Steel is a turnaround-story buy under USD5 on the Australian Securities Exchange (ASX) using the symbol BSL and on the US over-the-counter (OTC) market using the symbol BLSFF.

BlueScope also trades on the US OTC market as an American Depositary Receipt (ADR) under the symbol BLSFY. BlueScope’s ADR, which is worth five ordinary, ASX-listed shares, is a buy under USD25.

Health care companies with significant exposure to the northern hemisphere, including AE Portfolio Conservative Holding CSL Ltd (ASX: CSL, OTC: CMXHF, ADR: CMXHY) and medical diagnostics firm Sonic Healthcare Ltd (ASX: SHL, OTC: SKHCF, ADR: SKHCY), also stand to benefit from a weaker aussie.

CSL, fiscal 2013 results for which we discuss in this month’s Portfolio Update, is a buy under USD58 on the ASX using the symbol CSL and on the US over-the-counter (OTC) market using the symbol CMXHF.

CSL also trades on the US OTC market as an American Depositary Receipt (ADR) under the symbol CMXHY. CSL’s ADR, which represents 0.5 of an ordinary, ASX-listed share, is a buy under USD29.

Cochlear’s fiscal 2013 revenue was down 3 percent to AUD752.7 million, though total cochlear implant sales were up 16 percent to 26,674. Net profit after tax surged by 133 percent to AUD132.6 million, and management boosted the final dividend by 2 percent to AUD1.27.

Sonic is the world’s third-largest pathology services provider, trailing LabCorp (NYSE: LH) and Quest Diagnostics Inc (NYSE: DGX). But it’s the only truly global player, with significant operations in the US, the UK, Germany and Switzerland in addition to Australia and New Zealand.

Thirty-one percent of Sonic’s fiscal 2013 first-half revenue came from its home market, Australia, where revenue grew by 5.5 percent, and 25 percent was derived from Europe, which grew by 13.8 percent. Most of the rest came from the US.

Overall earnings before interest, taxation, depreciation and amortization (EBITDA) grew by 6.5 percent in constant currency terms.

Sonic gave full-year fiscal 2013 guidance in August 2012 of EBITDA growth of 5 percent to 10 percent over the 2012 levels of AUD624 million on a constant currency basis.

Sonic Healthcare is a buy under USD13.50 on the Australian Securities Exchange (ASX) using the symbol SHL and on the US over-the-counter (OTC) market using the symbol SKHCF.

Sonic also trades as an American Depositary Receipt (ADR) on the US OTC market under the symbol SKHCY. Sonic’s ADR, which is worth one ordinary, ASX-listed share, is a buy under USD13.50.

Industrials names such as Amcor Ltd (ASX: AMC, OTC: AMCRF, ADR: AMCRY), which makes boxes and flexible packaging for cigarettes, will benefit from easing pressure on local companies that comes from high labor and manufacturing costs that makes products more expensive to offshore customers.

Management reported underlying profit from its regional packaging and distribution businesses for fiscal 2012 declined by 4.5 percent to AUD159.7 million, due in large part to difficult economic conditions as well as a high Australian dollar eating into sales volumes.

Management recently announced a plan to spin off its Australian canning, bottling and carton business, which had fiscal 2012 revenue of AUD2.87 billion.

After the demerger Amcor will have packaging plants in more than 40 countries spread across the globe, with a focus on hard plastics and flexible materials used to package goods. The Australian business will focus on fiber, glass and beverage-can packaging. The distribution business operates in five countries, including the US.

Amcor is a buy under USD9.50 on the Australian Securities Exchange (ASX) using the symbol AMC and on the US over-the-counter (OTC) market using the symbol AMCRF.

Amcor also trades as an American Depositary Receipt (ADR) on the US OTC market under the symbol AMCRY. Amcor’s ADR, which is worth four ordinary, ASX-listed shares, is a buy under USD38.

Adelaide Brighton Ltd (ASX: ABC, OTC: ADBCF), which relies on imported clinker to make its cement, was one of the few domestic manufacturers to benefit from rising Australian dollar, as more than a quarter of cement was made from imported clinker.

This is one thing to watch in management’s commentary when the company reports results on Aug. 21, as hedges in place likely protected fiscal 2013 first-half numbers against recent decline. Adelaide Brighton is a buy under USD3.30.

Retailers such as David Jones Ltd (ASX: DJS, ADR: DJNSY) that import significant inventory have also benefited from a stronger aussie. They’ve also been hurt by competition from offshore retailers whose products have been relatively cheaper.

It will be interesting to see how retail management teams adjust to the softer aussie and whether the benefits of reduced competitive pressures will offset higher costs to stock their stores. David Jones is a hold.

The Long View

Once China’s transition to an economic model that supports a middle class is well underway recognition of Australia’s unique positioning as a key trading partner with what will one day soon be the world’s largest economy will be reflected in a gradually appreciating currency.

Much of the initial reaction to the RBA’s quarterly monetary policy statement focused on the downgrade to its short-term growth forecast. The longer-term picture was much more positive: By 2015 the Australian economy could be growing strongly, with GDP advancing by 3.5 percent or more as significant gas projects come on stream while companies in other sectors run out of spare capacity and invest to meet rising demand.

In the RBA’s view, an investment revival in non-resource sectors and the strength of exports will be supported by household consumption rising in line with its long-term average, offsetting efforts by commonwealth and state governments to get budgets back into surplus and what would be by then a rapid winding down of the level of investment in the resources sector.

The growth would be sufficient to reverse the rise in unemployment that is likely over the next 12 to 18 months. The world economy would have been growing around its long-term average rate of about 3.5 or 3.75 percent throughout 2014, and fortunes for Australia’s trading partners will be much improved.

If reality even vaguely tracks the RBA’s forecast there will likely be no further need for cuts to the overnight cash rate. Rates are already at a level the RBA considers “accommodative” and “stimulatory,” and it expects moves since November 2011 to gain traction over the remainder of 2013 and into 2014.

I expect the Australian dollar to stabilize around USD0.90, with downside from here in the area of USD0.85. Growth in China should also stabilize in the 7 percent to 7.5 percent range for annualized change in GDP, with positive knock-on effects for the Australian economy.

Australia’s proximity to high-growth Asian economies ensures it will have markets for its ample stores of iron ore, coal, natural gas and other resources for decades to come.

Australia remains a “risk on” play, as its fortunes are clearly tied to global demand growth, particularly from Asia. When prospects are bright and investors are bullish, the Australian dollar rallies. When the mood darkens and money searches for safety, the aussie sells off.

But over the course of the past decade investors–institutions as well as sovereigns–have purchased increasing amounts of Australian-dollar denominated bonds, corporates and governments. This diversification has come at the expense of developed-world currencies such as the US dollar, the British pound, the euro and the Japanese yen. And it reflects Australia’s rising and durable global profile.