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Is the Aussie dollar heading for parity?

Australian dollar notes
Carla Gottgens | Bloomberg | Getty Images
Australian dollar notes

The Australian dollar could hit parity by year end, some analysts say, after the battered currency began to regain ground this month, helped by positive economic data out of China, the country's largest trading partner.

"It's a good time to buy the Australian dollar," said Clifford Bennett, chief economist at financial services firm White Crane Group. "China has stabilized, so the resource boom [in Australia] isn't over...it's Australia's boom time."

This has been a turbulent year for the Aussie. After remaining stubbornly strong for the first four months of the year, the currency declined over 16 percent to a three-year low of US$0.8848 in early August, as concerns about a slowdown in China's economy, and the consequent impact on Australia's all-important mining sector, knocked sentiment. Other factors, such as a strong U.S. dollar and dovish rhetoric from Australia's central bank, have also weighed on the Aussie.

(Read more: Australia's election is over, what now for economy?)

However, the beleaguered currency has made a turnaround this month, climbing to a seven week high of US$0.9320 on Tuesday, after above-view Chinese industrial production data raised hopes that the world's second-largest economy is stabilizing.

The Aussie dollar held within sight of that peak on Wednesday.

According to White Crane Group's Bennett, investors had vastly overestimated the extent of China's slowdown and its impact on Australia's currency.

"I expect parity by year-end [for the Australian dollar]," said Bennett.

"The currency was sold off on the resource boom [in Australia] being over and weak data [in China]. I think that will change after the [Australian Federal] election and China has surprised," he said. He added that he expects China to grow between 7.5 and 8.2 percent this year, above the Chinese government's official gross domestic product growth forecast of 7.5 percent.

(Read more: Australia's central bank mangles message on A$, rates)

According to Bennett, the positive impact of the federal election result announced this week, which ushered in a new Liberal National Coalition government, was another reason to be bullish on the Aussie.

"The big news is that we had a change of government over the weekend and the new prime minister and his Treasury are certainly going to move things forward, with tax cuts, the cutting of red tape," said Bennett. "A whole lot of businesses have held up from investing and that will come through now, so it is going to be a positive few months."

Currency analysts at BNP Paribas also expect further resilience in the Aussie dollar.

"Should geopolitical risks remain in check we believe that the evidence of stronger global economic momentum, compounded by positive surprises to China's activity data this week, bode well for the Australian dollar," the banks' analysts said in a note. Short positions on the currency now appear stretched and were vulnerable to a further unwind, they added.

But Ray Attrill, co-head of FX strategy at National Australia Bank, said although increased confidence in China could boost the Aussie by another 2 percent, he expected further downside this year.

(Read more: Bottom line on Aussie earnings: Not too bad)

"I don't think [it will reach] parity, we've still got a forecast for US$0.86 by the end of this year and we're not changing that," he said.

"There are a lot of moving parts to the Australian dollar equation and China is only one of them," said Attrill. He expects the Aussie's recent rally to lose steam once the market starts to price in the prospect of another rate cut from Australia's central bank, and when the recent jump in business confidence proves unsustainable.

This week a monthly survey from the National Bank of Australia found that business confidence had surged to its highest reading in May 2011. The Reserve Bank of Australia's August interest rate cut and expectations for a Liberal National Coalition election victory were said to be behind the rise in sentiment.

—By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie

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