You Just Can’t Keep This Currency Down

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Forget a weakening economy and the prospect of further monetary easing. Here's what will keep the Aussie dollar robust in the months ahead - a rebound in commodity prices and even lower interest rates among the world's big economies.

"It (the Australian dollar) has been the hardest currency to sell over the last 18 months," Patrick Bennett, foreign exchange strategist at CIBC in Hong Kong told CNBC. "When you've still got policy levers in global central banks accommodative, currencies like the Aussie dollar are going to gain, outperform."

The Australian dollar, trading around $1.057 on Tuesday, has risen about 4 percent since October, taking interest rate cuts by the Reserve Bank of Australia (RBA) in October and December in its stride to remain comfortably above the $1-mark.

Latest economic data suggest at least one more rate cut is on its way, said analysts. Australian retail sales fell an unexpected 0.1 percent in November from a month earlier, while data on Tuesday from ANZ Bank showed job advertisements fell in December for a 10th straight month, pointing to weakness in the labor market.

(Read More: Will Lady Luck Return to Australia This Year?)

As theory in currency circles goes, this backdrop points to a weaker Aussie dollar. But the practice is this, said forex analysts, as long as interest rates in Australia are above benchmark borrowing rates elsewhere , underlying support for the Aussie dollar will remain in place.

Australia's benchmark interest rate is at 3 percent, matching the record lows hit during the global financial crisis. Still, that's well above interest rates in the U.S. and Japan which are near zero and the euro zone's key rate of 0.75 percent.

Laura Fitzsimmons, vice president for futures and options at JPMorgan Investment Bank, said that a lot of short-term players who want to go short the Aussie dollar, in other words bet that the currency will go down, have been caught out by the currency's resilience.

(Read More: Why Hedge Funds Like the Australian Dollar)

Richard Yetsenga, head of global markets research at ANZ in Sydney, expects the Aussie to break through $1.06 to trade higher. The Australian dollar has climbed 10 percent from its low in 2012 of around $0.96.

"There are some things domestically that argue the Aussie could remain under pressure or stay capped and we certainly expect the Reserve Bank of Australia to cut interest rates a little bit this year," Yetsenga said.

"I think regardless of what's going on domestically, in terms of interest rate cuts, the weaker U.S. dollar means that money globally will be looking for high-quality homes and the Aussie dollar is still one of those," he added.

Commodity Currency

Analysts point to the rebound in commodity prices and brighter global outlook as other reasons why the Aussie dollar will remain firm. Prices for iron ore, a major Australian export, hit its highest level in 15 months last week.

Coupled with a recovery in commodity prices are expectations for stronger global growth this year following brighter economic data out of the U.S. and China, the world's two biggest economies.

(Read More: Has China's Long-Awaited Recovery Finally Arrived?)

"Fair value for the Aussie dollar is well below current levels," said Martin Lakos, division director at Macquarie Private Wealth in Sydney.

"With the potential for lower interest rates, we would expect the Aussie dollar to come off a little bit but if global growth recovers, then the Aussie dollar, the Canadian dollar, these are all global growth currencies, so they won't come off that much."

(Read More: Why the Canadian Dollar Is Hot)

- By CNBC's Dhara Ranasinghe; follow her on Twitter: @DharaCNBC