Despite facing a series global headwinds and soft numbers out of Australia in recent weeks, the Aussie dollar has remained resilient — rising 3.5 percent since the start of the year. But one analyst is calling for the commodity currency to drop as low as 80 to 90 cents against the U.S. dollar by the end of 2012 on increasing downside risks.
"If you look over the last six months, commodity prices have collapsed, we've seen the reserve bank cut interest rates twice with the market predicting another 100 basis points of easing still to come," Andrew Pease, Investment Strategist (Asia Ex Japan) at Russell Investment Group told CNBC on Monday.
"[The Aussie dollar] can't go up much more, it's got more downside potential."
The first of this year's rate cuts could come as early as February 7, when the Reserve Bank of Australia (RBA) meets next.
Russell Jones, Global Head of Fixed Income Strategy at Westpac Bank backs the call for an Aussie dollar correction, but doesn't see the currency heading lower than parity in the next three to six months.
"I think the Aussie's getting up towards the top of the range quite frankly, it looks a little bit overvalued," Jones said.
"We got a couple of rate cuts... if anything the risk is more of those, rather than less. That's going to take some of the upward momentum away from the Aussie dollar of course."
But Russell Investment's Pease is convinced that the strong Aussie dollar is already hurting the economy, pointing to exporters like Toyota , which recently announced cutbacks at its suburban Melbourne manufacturing plant because of the continued strength of the local currency.
"There's a lot of pain in the non-mining economy out there right now, and the longer the Aussie stays up around a 1.05 cents, the deeper that pain is going to be," Pease said. "1.05 cents for them [exporters] is very painful, 95 cents is barely painful and 85 cents is where their comfort zone would be."
Emma Lawson, Senior Currency Strategist at National Australia Bank, also sees downside for the Aussie, but she says Pease's call for a drop to 80 cents is an "extreme risk."
"We would think something more akin to 96 is more to where the risks lie, but 80 is near those longer term levels. I think you need to see much much weaker outlook for China to get those levels."