The Australian dollar has taken a beating since Donald Trump was elected as the next president of the United States, leaving traders puzzling over the currency's next move.
The currency has dropped 5.9 per cent since hitting a November high of US77.77¢ on November 8. On Friday it sank through US74¢ and on Tuesday morning was at US73.65¢.
It has been "significantly tarnished," said Stephen Innes, senior currency trader at FX and CFD broker OANDA Australia and Asia Pacific.
"And with US inflation expectations mounting on the proposed bombastic fiscal spend, traders are quickly repricing a steeper US Fed rate hike tangent."
The market has almost fully priced in a December rate hike by the US Federal Reserve and discussion has now turned towards just how many rate rises are likely to take place next year.
"We don't think there's a huge inflation threat, so the US Fed might not need to tighten a lot next year," said Janu Chan, senior economist at St George.
"The Fed will probably be a bit cautious, so we'll see the US dollar pare back some of those gains and that will be supportive of all the currencies it's against, like the Aussie."
A rise in interest rates signals the American economy is healthier than previously thought, as such, the US dollar is seen as a safer place to invest than other currencies.
UBS has developed a replica of the RBA's internal fair value model for the Aussie, and have found the local currency is right on where the central bank expects.
"The bottom-line is that unless the Australian dollar moves significantly higher, a moderate drift higher in the Aussie from here under current conditions is unlikely to overly worry the RBA or be a catalyst for further RBA rate cuts," said Scott Haslam, chief economist at UBS.
The flow-on effect
The Reserve Bank of Australia is likely to be satisfied that the Aussie has fallen far enough to aid the rebalancing of the economy and provide a positive backdrop for exporters and commodity companies.
A resurgence in commodity prices, particularly iron ore and coal, has prevented the Aussie from plummeting to greater depths.
"Over the medium term, the fact that commodity prices seem to be holding up will leave us comfortable with keeping Aussie around 74," said Ms Chan, though she noted that the Australian dollar and iron ore prices had diverged in recent weeks.
"This makes me think markets aren't paying too much attention to [that correlation] right now."
But that could change as early as next year.
"The combination of stronger commodity prices and the ramp-up of LNG production suggests Australia will post the largest trade surpluses as a share of GDP during 2017 since any time since the early 1970s," said Tim Toohey, Australian chief economist at Goldman Sachs.
"Ultimately the state of the external accounts is the truth serum for the currency, and as such we acknowledge clear upside risk to the $A from current levels."
The prospect of a generous fiscal stimulus plan by Mr Trump has placed a rocket underneath the US dollar, which has soared more than 3 per cent since the US election.
"An appreciating US dollar weakens the prospects for the US," said Ms Chan, adding that will be playing on the US Fed's mind as it looks at how quickly it will raise rates next year.