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Aussie dollar strength: Why it's here to stay

David Wall | Lonely Planet Images | Getty Images

The resilience in the Australian dollar in recent times may have confused some investors, given worries over the health of China – Australia's largest trading partner – but investment bank Morgan Stanley says the upward momentum should remain intact for a while.

The Aussie jumped to its highest levels in four months against the greenback Tuesday to $0.9310 after the Reserve Bank of Australia left interest rates unchanged at a record low of 2.5 percent.

The currency is now up 3.7 percent year to date against the U.S. dollar, despite a string of disappointing data out of China both on the manufacturing and trade fronts.

Read More Aussie dollar resilience: Here today, gone tomorrow?

In a note entitled "AUD: Why so strong?" Morgan Stanley says there are a number of factors drawing investors to the Aussie dollar –in particular, the revival of overseas investor appetite for the Australia's government debt.

They attribute this shift to the fact that the Australian government has returned to printing a lot of new debt, posting a record 23 billion Australian dollars ($21.2 billion) of net bond issuance in the first quarter of this year. This coming after five quarters of little net buying.

Japanese investors led the trend, said Morgan Stanley, buying 5.4 billion Australian dollars in government bonds in the four months to January, having sold 34.2 billion Australian dollars in debt during the 11 consecutive months to September 2013.

The development has led to the bank's analysts to believe "that Australian dollar outperformance can continue," the report concluded.

Read MoreWhy the Aussie need not fret the China slowdown

Other analysts also see the Aussie dollar retaining its strength, but cited other factors beyond the demand for Australian government bonds.

"The bounce in the Aussie is partly due to domestic factors, but also the environment for carry trades has improved in the last few weeks," said Divesh Divya, currency strategist at Standard Chartered, referring to the practice of traders selling low yielding currencies and buying higher yielding ones, cashing in on the interest rate differential.

Read MoreKiwi-Aussie to hit levels not seen in 40 years: HSBC

The Australia dollar has traditionally been a popular choice for carry trades due to the country's high interest rates relative to other major economies around the world. A series of rate cuts in recent years have eroded its appeal, but that could be changing.

"We are seeing a rebound in almost all high yielding currencies including the Aussie, Kiwi, the South African rand, Brazil real and the Turkish lira. This is partly due to the low volatility we are seeing across asset classes, such as U.S. Treasury yields, and also Yellen's comments a couple of days back were quite dovish," he added.

On Monday Federal Reserve chair Janet Yellen said there was still room for the central bank to help the economy, given the halting pace of the recovery and still moribund job market, comments widely perceived as bearish for the U.S. dollar.

Read MoreWill China's slowdown benefit the rest of the world?

Divya expects the Australian dollar to retain its strength through to the end of the year, hovering at around $0.90, noting that there could see some range trading between $0.88 and $0.90 beforehand.

"If it goes to $0.95 we might see some verbal intervention by the RBA again. So the upside is actually limited in our view," he added.

The currency was trading at $0.9234 on Wednesday.

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